The buyer is insisting on a massive earnout to bridge our valuation gap but we are terrified they will starve our marketing budget and kill our ability to hit the targets. How do we structure the operational covenants to protect our earnout?

Question

Tyler Smith · Accepted Answer

When a buyer uses an earnout to bridge a valuation gap, they are shifting the execution risk back to you. The biggest danger is that once they control the checkbook, they will cut expenses to boost their own short-term bottom line, starving your business unit of the resources needed to hit your earnout metrics.

To protect your earnout, you must negotiate strict operational covenants before signing the definitive agreement. Do not rely on vague promises of good faith. Instead, embed your existing EOS® operating model directly into the purchase agreement. Specifically, define a minimum operating budget, marketing spend, and head count that the buyer must maintain during the earnout period.

You should also write your weekly Scorecard metrics and V/TO® targets into the contract as the baseline for operational support. Insist on a covenant that grants your leadership team continued autonomy over day-to-day operations, including hiring and firing decisions within your Accountability Chart.

Additionally, structure the earnout on top-line revenue or gross profit rather than net income. Buyers can easily manipulate net income through corporate overhead allocations, shared service fees, and administrative charges. If the buyer insists on an EBITDA-based earnout, negotiate a strict definition of adjusted EBITDA that explicitly excludes any parent company allocations or post-closing integration expenses. Protecting your earnout is not just about financial calculations. It is about locking in operational control.