A buyer is offering seventy percent cash at close and thirty percent in an earnout tied to gross profit targets over twenty-four months, but their agreement gives them unilateral authority over product pricing. How do we protect our earnout?

Question

Tyler Smith · Accepted Answer

Accepting an earnout while giving the buyer unchecked operational control over your pricing and sales strategy is financial suicide. If the buyer has the legal right to slash margins to capture market share, or to raise prices so high that sales volume collapses, your earnout targets will fail while the buyer reaps long-term strategic benefits.

To protect a gross profit earnout, you must ringfence operating covenants inside the definitive purchase agreement. First, establish that your existing pricing models and margin thresholds remain governed by historical practice for the duration of the earnout period. Any downward adjustment in product pricing must require the written consent of the seller or trigger an automatic, dollar-for-dollar reduction in the gross profit hurdle required to achieve the full earnout payout.

Second, add an operational continuity clause. The business must be operated in the ordinary course, consistent with past practice. The buyer cannot redirect sales leads to other portfolio companies, starve the business of working capital, cut the sales and marketing budget below agreed historical percentages of revenue, or reassign key delivery personnel without your approval.

Third, negotiate an acceleration clause triggered by corporate interference. If the buyer breaches these operating covenants, changes commercial pricing over your objection, or sells the business to a third party during the twenty-four month window, the entire remaining earnout balance must accelerate and become immediately payable in cash. Never treat an earnout as an operational gamble; treat it as deferred purchase price protected by rigid legal constraints.