We are agreeing to an earnout based on gross profit targets, but we are terrified the buyer's accounting team will manipulate the numbers post-close. How do we structure the dispute resolution and accounting provisions in the purchase agreement to protect our payout?

Question

Tyler Smith · Accepted Answer

Never sign an earnout agreement without concrete, hyper-specific accounting guidelines. If you base your earnout on gross profit, the buyer can easily manipulate internal cost allocations, corporate overhead charges, and shared resource expenses to depress your numbers. To prevent this, your purchase agreement must specify that gross profit will be calculated using the exact same accounting principles, methods, and historic practices used to prepare your closing financial statements. Insist on a clause that explicitly prohibits the allocation of any parent company overhead, corporate IT charges, or management fees to your business unit during the earnout period. Furthermore, use your weekly Level 10 Meeting™ structure to maintain operational visibility. Require the buyer to provide monthly written calculations of the earnout metrics. If a dispute arises, establish an expedited dispute resolution process in the agreement. Instead of going to court, specify that an independent, pre-selected accounting firm will audit the calculation within thirty days, with the losing party paying the fees. This prevents the buyer from using expensive litigation to drag out the dispute and force you into a cheap settlement.