The buyer is insisting on a thirty percent earnout tied strictly to post-close net income, but they plan to integrate our marketing department into their corporate parent. How do we negotiate the specific accounting exclusions and floor protections to keep their overhead from killing our payout?

Question

Tyler Smith · Accepted Answer

An earnout tied to net income after a corporate integration is a trap. The moment the buyer consolidates your marketing or administrative functions, they can dump corporate overhead charges onto your profit and loss statement. This completely destroys your bottom line and kills your payout, even if your sales are skyrocketing.

You must insist that the earnout is calculated on EBITDA, not net income, and specifically on an adjusted basis. Negotiate strict operational covenants in the purchase agreement. Your agreement should state that no corporate overhead, parent company management fees, or shared services allocations can be charged to your business unit during the earnout period.

Additionally, protect your operations. Your post-close leadership team must retain control over their budget and hiring decisions, as outlined in your EOS V/TO. If the buyer insists on taking over marketing, you must establish a pre-determined, fixed cost allocation for those services, or base the earnout purely on top-line revenue growth with a gross margin floor.

Use your weekly Level 10 Meeting structure to monitor these financial metrics post-close. If the buyer attempts to adjust allocations, you must have the contractual right to audit their books. Never sign an earnout without clear operational vetoes, otherwise you are letting the buyer run your business with your own money on the line.