The buyer is proposing a three-year earnout based on net revenue growth, but we are terrified they will starve our sales team of budget and make it impossible to hit our targets. How do we write operational covenants into the purchase agreement to guarantee our earnout is funded and protected?

Question

Tyler Smith · Accepted Answer

Relying on a net revenue earnout without operational guardrails is a recipe for disaster. If the buyer controls the budget, they can easily underfund your marketing, freeze hiring, or reallocate your sales talent to other divisions, crushing your chances of hitting the target. You must negotiate specific, legally binding operational covenants in the purchase agreement. First, secure a commitment for a minimum annual operating and marketing budget dedicated exclusively to your division. Second, mandate that your division retains its dedicated personnel as outlined in your Accountability Chart, preventing the buyer from raiding your team. Third, include an acceleration clause. This clause states that if the buyer terminates you without cause, sells your division, or fails to meet the agreed-upon budget commitments, the entire earnout immediately becomes due and payable at one hundred percent of the target. This ensures the buyer has skin in the game and cannot manipulate your operational resources to avoid payment. By anchoring these protections to concrete operational metrics, you keep control over your destination and prevent the buyer from turning your earnout into a phantom payment.