The buyer wants to tie forty percent of our payout to cross-selling targets with their other portfolio companies. How do we protect ourselves?

Question

Tyler Smith · Accepted Answer

Accepting an earnout based on cross selling targets with a buyer's other portfolio companies is highly risky. You are essentially gambling your hard earned equity on their ability to execute an integration strategy that you do not control. If their sales team fails to pitch your product, or if their portfolio companies resist the partnership, you lose your payout.

To protect your valuation, you must negotiate strict operational covenants. First, do not let them measure the earnout on net profit or EBITDA, which can be easily manipulated by corporate cost allocations. Tie the earnout strictly to gross revenue generated from these specific cross selling channels.

Second, write specific buyer performance obligations into the purchase agreement. Require the buyer to dedicate a specific number of sales representatives to your product line, allocate a set marketing budget, and include your services in their standard sales compensation plans.

Third, maintain operational veto power. You must retain control over how your team delivers the service to these new clients. If the buyer starves your operational team of resources, your customer satisfaction will plummet, ruining your reputation and your earnout potential.

If the buyer refuses to agree to these operational covenants, walk away from the cross selling structure. Propose a simpler earnout based on maintaining your existing base business revenue, which you actually control.