The buyer is offering a structure with a significant earn-out over three years, but we are worried they will cut our marketing budget or reallocate our key developers after closing. How do we structure post-closing operational covenants to protect our ability to hit our earn-out targets?

Question

Tyler Smith · Accepted Answer

Accepting an earn-out means you are taking on significant risk, as you are tying a portion of your purchase price to performance that occurs after you yield control. To protect your payout, you must negotiate strict operational covenants in the purchase agreement that limit the buyer's ability to interfere with your business operations.

First, define the metric. Base your earn-out on gross revenue or gross margin rather than net income or EBITDA. This prevents the buyer from using corporate overhead allocations or accounting adjustments to artificially reduce your performance metrics.

Second, secure resource commitments. Require the buyer to agree to a post-closing operating plan and budget that is attached directly to the purchase agreement. This plan should specify headcount levels, marketing spend, and capital expenditure budgets required to hit the targets.

Third, protect your governance structure. Ensure that your current leadership team retains operational control over daily decisions. You can use your existing Accountability Chart to define who has the authority to hire, fire, and allocate resources post-closing. If the buyer insists on integration, include a covenant stating that any material change to your operations requires your written consent. By locking in these operational boundaries, you ensure you have the tools and autonomy needed to capture your full valuation.