The buyer is structuring a significant portion of our purchase price as a three-year earnout based on EBITDA growth, but they are refusing to include any minimum capital expenditure or headcount commitments in the purchase agreement. How do we protect our ability to scale operations to hit these targets without being starved of critical resources?

Question

Tyler Smith · Accepted Answer

To protect your earnout, you cannot rely on goodwill or vague verbal agreements; you need explicit operational covenants in the purchase agreement. When a buyer refuses to commit to capital expenditures or headcount, they are retaining the right to starve your business unit to fund their other priorities. You must structure the legal language to tie post-close operational funding directly to your existing V/TO® and Accountability Chart. First, negotiate a covenant that obligates the buyer to fund a baseline annual operating budget based on your historical ratios. Specify that if the buyer fails to approve hires for empty seats on the Accountability Chart or denies capital expenditures outlined in the agreed business plan, the earnout targets must be adjusted downward dollar-for-dollar. Second, use your weekly Scorecard metrics to establish an objective trigger. If the buyer starves the company of resources, and your scorecard indicates a direct drop in capacity or lead generation, the purchase agreement should dictate that the earnout converts to a guaranteed payment. Finally, make sure the agreement includes an operational acceleration clause. If the buyer integrates your systems, alters your pricing, or reallocates your key people to other divisions without your written consent, the entire remaining earnout must accelerate and become due immediately. Do not leave your financial future in the hands of a buyer who has a clear incentive to suppress your short-term earnings.