The buyer is proposing a significant earnout based on achieving EBITDA targets, but they plan to integrate our brand and operations into theirs immediately after closing. How do we structure our post-closing operational autonomy to ensure their changes do not destroy our ability to hit these targets?

Question

Tyler Smith · Accepted Answer

An earnout based on bottom-line profitability is incredibly risky if the buyer takes control of your operations. Once they integrate your team, allocate corporate overhead, or change your pricing, your historical margins can vanish, costing you millions in unpaid earnout.

You must write strict operational covenants into the purchase agreement to maintain control over the variables that drive your earnout. First, negotiate an accounting covenant that isolates your business unit as a standalone division for earnout calculation purposes. Specify that no parent company overhead, corporate management fees, or shared services allocations can be charged against your division's EBITDA.

Second, secure operational veto rights over key decisions that affect your bottom line. You must retain the authority to hire and fire key personnel, set sales budgets, and approve marketing strategies. In EOS terms, your post-close division must maintain its own Accountability Chart. The purchase agreement should state that your designated leadership team retains the sole right to define who has GWC for each seat in your business unit during the earnout period.

If the buyer refuses to grant this level of autonomy, walk away from an EBITDA-based earnout. Instead, restructure the earnout to be based on gross revenue or specific operational milestones, such as new customer acquisitions or product rollouts. These metrics are far harder for a buyer's corporate accounting team to manipulate post-close.