We are negotiating a deal where forty percent of the purchase price is tied to a three year earnout, but we are terrified the buyer will starve our division of capital or reallocate our key technical personnel to their other portfolio companies. How do we structure binding post close capital allocation covenants to protect our earnout targets?

Question

Tyler Smith · Accepted Answer

An earnout is only as good as your ability to execute post close. If a buyer starves your division of marketing budget or transfers your key engineers to another portfolio company, your earnout targets will quickly become impossible to hit.

To protect your payout, you must negotiate strict post close operational covenants directly into the purchase agreement. Do not rely on verbal promises.

First, define a dedicated capital allocation floor. The agreement must state that the buyer will provide a specific budget for capital expenditures and marketing during the earnout period.

Second, secure key personnel covenants. The buyer must be contractually prohibited from reallocating any personnel listed on your legacy Accountability Chart without your written consent.

Third, maintain your operating system. Require the buyer to let you run your weekly Level 10 Meetings and quarterly planning sessions. This preserves your execution capacity and team alignment.

Finally, ensure the earnout is calculated on top line revenue or gross profit, not net income. This prevents the buyer from using corporate overhead allocations or parent company debt service to artificially reduce your profitability. If they insist on net income, insist on absolute operational autonomy over your budget.