We agreed to an earnout based on gross profit, but the buyer is planning to migrate our customer service to their proprietary, non-automated system. How do we write protective operating covenants into the purchase agreement to prevent their operational inefficiencies from destroying our earnout?

Question

Tyler Smith · Accepted Answer

Agreeing to an earnout is always risky, but it becomes dangerous when the buyer plans to integrate your operations into their less efficient systems. If they migrate your automated customer service to their manual system, your operating costs will rise, and your gross profit targets will suffer. To protect your earnout, you must negotiate strict operational covenants in the purchase agreement.

These covenants must require the buyer to maintain your existing operating systems and technology stack throughout the earnout period. They should also prohibit the buyer from reallocating your staff or resources without your consent. If the buyer insists on integration, require that the earnout calculation be adjusted to account for any increased costs or lost efficiency caused by their changes.

Additionally, you should secure a clause that guarantees your team retains operational control over the division during the earnout period. This ensures you have the authority to execute your V/TO and hit your targets without corporate interference. If the buyer refuses to grant these protections, you should demand a higher upfront cash payment to offset the risk of their planned operational changes.