The buyer is insisting on a thirty percent earnout based on achieving future EBITDA targets, but we are worried they will starve our business of resources post-close and make those targets impossible to hit. How do we structure the post-closing operational covenants to protect our payout?

Question

Tyler Smith · Accepted Answer

An earnout based on future EBITDA targets is a minefield. Once the transaction closes, you lose absolute control over the business. If the buyer cuts your marketing budget, delays hiring, or reallocates your key staff to other divisions, your EBITDA will plummet, and your earnout will evaporate. To prevent this, you must negotiate strict operational and financial covenants in the purchase agreement. First, secure a covenant that requires the buyer to run your division as a standalone business entity with its own profit and loss statement. This prevents them from burying your earnings under corporate overhead. Second, define an agreed-upon operating budget directly in the deal documents. This budget must outline the exact headcount, capital expenditures, and marketing spend required to hit your targets. If the buyer fails to fund these initiatives, it must trigger a covenant breach that accelerates your earnout payment. Finally, maintain your operational rhythm. Ensure the agreement protects your leadership team's autonomy to run your EOS® tools, including your Level 10 Meeting™ and weekly Scorecard tracking. This ensures your team remains aligned and focused on their Rocks without corporate interference. Never accept an earnout without these operational safeguards.