The buyer is offering a high valuation but insists on a two-year earnout tied to EBITDA targets, which we worry will be manipulated by their corporate overhead allocations post-close. How do we define and protect our operating EBITDA inside the purchase agreement?

Question

Tyler Smith · Accepted Answer

Never sign an earnout agreement that allows the buyer to apply post-close corporate overhead allocations to your income statement. Private equity and corporate buyers are notorious for loading up acquired entities with management fees, centralized IT costs, and executive salaries, which artificially depresses your EBITDA and wipes out your earnout.

To protect your payout, you must negotiate strict accounting definitions in the purchase agreement. Define your target as adjusted operating EBITDA, specifically excluding any parent-level overhead, centralized support fees, or integration costs. The agreement should state that your business will be evaluated on a standalone basis, using the same accounting policies and historical practices you used prior to the transaction.

Additionally, secure covenants that protect your operational autonomy. You must retain the authority to manage your own headcount, pricing, and capital expenditures as outlined in your V/TO. If the buyer forces you to adopt a centralized sales team or mandates software tools that increase your operating expenses, the purchase agreement must require a dollar-for-dollar adjustment back to your EBITDA target. By setting these strict boundaries, you keep control of your operational execution and ensure your earnout payout is driven by your team's performance, not the buyer's corporate accounting decisions.