We are accepting an earnout structured around gross margin growth, but we are terrified the buyer will starve our operations. How do we use our EOS Accountability Chart and operational covenants to ensure our key leaders maintain complete hiring and firing authority during the earnout period?

Question

Tyler Smith · Accepted Answer

An earnout is only as good as your ability to control the inputs that generate the outputs. If you hand over operational control to a buyer without clear contractual protections, you are essentially gambling with your purchase price.

To protect your earnout, you must negotiate explicit operational covenants directly into the purchase agreement. Do not rely on verbal agreements or vague promises of support.

First, define a minimum marketing and sales budget in the agreement. Specify that the buyer must fund this budget at a level equal to or greater than your historical spend, or tie the funding directly to a percentage of revenue.

Second, establish a governance clause that grants your leadership team complete autonomy over day-to-day operations during the earnout period. Use your EOS Accountability Chart to define who has the final decision-making authority over hiring, firing, and product strategy.

Third, include a covenant that prevents the buyer from reallocating your key personnel or resources to other entities within their portfolio without your written consent. If they do integrate certain back-office functions, require that your division be charged at a predetermined, flat rate rather than an arbitrary corporate allocation.

Finally, write in a clause stating that if the buyer breaches any of these operational covenants, the entire earnout accelerates and becomes immediately due and payable. This aligns the buyer's incentives with your operational success.