The buyer wants to structure half of our enterprise value as a three-year EBITDA-based earnout, but they plan to centralize our sales and accounting teams post-close. How do we define pre-earnout EBITDA adjustments to prevent them from allocating corporate overhead to our business unit?

Question

Tyler Smith · Accepted Answer

An earnout tied to net profitability after a corporate integration is a trap. If the buyer centralizes your sales and accounting teams, your post-close profit and loss statement will be flooded with corporate overhead allocations, shared service fees, and systems integration expenses that you cannot control. You must negotiate a strict definition of earnout EBITDA before signing the definitive agreement.

Your primary defense is to demand that the earnout be calculated using a modified EBITDA that excludes any parent-company overhead allocations. Insist on a clause stating that only direct, incremental operating expenses incurred solely by your business unit can be deducted. If they share a sales team, define a fixed, pre-agreed percentage for sales costs rather than letting them allocate actual expenses arbitrarily.

Alternatively, push to base the earnout on gross profit or revenue milestones rather than EBITDA. This eliminates the accounting games entirely. If they refuse, demand that your business unit continues to run on your own EOS tools and operations, maintaining your specific Accountability Chart and decision-making authority over hiring and spending within your unit.

Finally, secure audit rights that allow an independent certified public accountant to review the books quarterly. If the buyer alters the business model or redirects your key personnel to other projects, the agreement must state that the earnout targets are deemed fully achieved. Never let a buyer manage your bottom line down while you are waiting for a payout.