The buyer has final operational authority over our business during an earnout period, and we are concerned their internal finance team will use aggressive cost allocations to artificially depress our earnout metrics. What specific inspection rights, accounting standards, and independent dispute resolution mechanisms must be written into the purchase agreement?

Question

Tyler Smith · Accepted Answer

If you agree to an earnout where the buyer controls day-to-day operations, the purchase agreement must strip their finance team of subjective accounting discretion. Buyers frequently manipulate post-close EBITDA or net margin earnouts by allocating parent corporate overhead, loading intercompany management charges, or shifting shared software licenses into the acquired business.

To protect your earnout proceeds, mandate these structural accounting terms:

- Explicit Accounting Framework: Require that earnout calculations follow GAAP applied consistently with the seller historical pre-closing accounting policies. Include an express negative covenant that bans the allocation of parent company executive compensation, central IT overhead, transaction-related legal fees, or debt financing costs to the earnout calculation.

- Mandatory Information and Audit Rights: The purchase agreement must require the buyer to deliver a detailed earnout calculation packet, complete with general ledger trial balances and supporting workpapers, within thirty to forty-five days of the measurement period. You must retain full audit rights to inspect books and records at the buyer operational facility.

- Independent CPA Determination: Provide a thirty-day window for the seller to submit a formal notice of disagreement. If the parties cannot resolve the dispute within thirty days, mandate that the disputed calculations be submitted to an independent, nationally recognized accounting firm acting as an expert and not an arbitrator. Their decision must be final, non-appealable, and binding.

- Fee Shifting: Require that the independent accounting firm fees be paid by the party whose proposed calculation was furthest from the final determination. This rule heavily penalizes the buyer if they use bad-faith accounting to suppress your earnout payout.