The buyer wants to structure our earnout based on achieving specific EBITDA targets, but we are worried they will load our business unit with corporate overhead or restrict our hiring. How do we write operational covenants into the purchase agreement to protect our earnout payout?

Question

Tyler Smith · Accepted Answer

Structuring an earnout based on EBITDA is incredibly risky because the buyer can easily manipulate that bottom-line number after taking ownership. If they integrate your operations, they can allocate parent-company overhead, increase shared service fees, or delay key hires, all of which will suppress your operating margins and destroy your payout.

To protect your earnout, you must negotiate strict operational covenants in the definitive purchase agreement. First, demand that the earnout be calculated using a normalized, pre-allocation EBITDA formula. This means the buyer cannot charge your business unit for corporate expenses, shared legal teams, parent-company marketing, or executive overhead unless those costs are directly requested and approved by your leadership team.

Second, secure operational autonomy over your day-to-day decisions. You must retain the authority to hire, fire, and compensate your team members according to your existing Accountability Chart and market rates. If the buyer controls your hiring budget, they can starve your delivery team of resources, making it impossible to hit your operational Rocks and growth targets.

Third, establish a dispute resolution mechanism that utilizes an independent accounting firm to audit the earnout calculations. Do not rely on the buyer's internal books. Insist on keeping your weekly Scorecard and operational processes running independently under your current leadership team structure. By outlining these protective boundaries in the legal documents, you prevent the buyer from using administrative accounting tricks to wipe out your hard-earned valuation.