The buyer wants us to agree to an earnout based on net income, but they are also planning to integrate our back-office operations into their slower parent company. How do we structure the deal to prevent their administrative overhead from killing our earnout payout?

Question

Tyler Smith · Accepted Answer

Agreeing to an earnout based on net income is incredibly risky when the buyer plans to integrate your operations. Once they merge your back office or allocate corporate overhead charges to your profit and loss statement, your profitability can vanish, taking your earnout with it. To protect your payout, you must negotiate strict operational and accounting covenants in the purchase agreement. First, demand that your earnout be calculated on gross revenue or gross profit margin rather than net income, which insulates you from their corporate overhead allocations. Second, secure a covenant that grants you operational autonomy during the earnout period, allowing you to maintain your current operating system. Argue that keeping your EOS® structure, including your weekly Level 10 Meeting™ and quarterly Rocks, is critical to hitting the growth targets the buyer expects. Show them that your structured operations are the reason the company is successful. By maintaining control over your team and your processes, you ensure that your people are not distracted by corporate bureaucracy. This operational protection allows you to execute your growth plan and secure your full earnout payout.