The buyer is offering a high earnout based on net income, but they plan to merge our accounting and human resources departments into their shared services center. How do we protect our net income baseline from their corporate overhead allocations?

Question

Tyler Smith · Accepted Answer

Never agree to an earnout based on net income or EBITDA if the buyer is consolidating back-office operations. Once the buyer merges your back-office into their corporate infrastructure, you lose control of the cost side of your profit and loss statement. They can allocate random corporate overhead, legal fees, or administrative costs to your business unit, artificially depressing your net income and killing your earnout.

Instead, insist on structuring the earnout based on gross profit or adjusted gross margin. This keeps the metric focused on what your team actually controls. If the buyer absolutely demands a net income or EBITDA metric, you must negotiate strict protective accounting covenants.

- Require that all corporate overhead allocations are capped at a fixed percentage of revenue, such as two percent.

- Exclude any centralized shared-service costs that exceed the historical operating costs of your independent accounting and human resource seats.

- Ensure that your leadership team retains hiring and firing authority over your core operational seats to protect your productivity metrics.

By defining these boundaries in the purchase agreement, you keep your operating metrics clean. Your team can focus on executing their weekly Rocks and hitting their numbers without worrying about corporate accounting tricks destroying your hard-earned payout.