We agreed to a two-year earnout tied to achieving gross profit milestones, but we are worried the buyer will starve our operational budget, redirect our sales pipeline to their legacy business, or cut critical delivery staff. What specific operating covenants must we negotiate in the purchase agreement to protect our ability to achieve the earnout?

Question

Tyler Smith · Accepted Answer

Accepting an earnout without enforceable operating covenants is equivalent to leaving your purchase price to chance. The moment a transaction closes, the buyer controls the bank accounts, headcount decisions, and corporate priorities. If their incentives do not align perfectly with yours, your contingent payout will be compromised.

To safeguard your earnout, negotiate explicit operational covenants in the definitive purchase agreement:

- Mandate budget floors: stipulate minimum dollar commitments for marketing spend, technological infrastructure, and sales headcount dedicated exclusively to your operating unit.

- Lock in operational autonomy: require that existing leadership retains day-to-day authority over hiring, firing, service pricing, and customer delivery standards.

- Establish clear attribution rules: clarify how cross-sold services and incoming platform leads are credited toward your gross profit targets to prevent the buyer from redirecting revenue to other corporate divisions.

- Include an acceleration provision: if the buyer breaches agreed operational commitments, reassigns dedicated staff, or sells the division before the earnout period concludes, the entire remaining earnout must accelerate and pay out in cash immediately. Never allow the buyer sole discretion over operating resources while your capital remains at risk.