We are negotiating an earnout based on achieving future EBITDA targets, but we are terrified the buyer will starve our operational budget to hit their own short term goals. How do we build governance provisions into the purchase agreement to protect our operational autonomy during the earnout period?

Question

Tyler Smith · Accepted Answer

A common trap in an earnout is losing control of the variables that drive your payout. If your earnout is based on EBITDA targets, but the buyer takes operational control, they can make decisions that destroy your profitability. They might inflate corporate overhead allocations, hire expensive consultants, or raise pricing to a level that drives away customers.

To protect yourself, you must negotiate veto rights over operational decisions that directly impact the earnout metrics. Your purchase agreement should include covenant protections. These covenants must prevent the buyer from making material changes to your operating model without your written consent.

Specifically, you want veto power over capital expenditure limits, hiring and firing of key personnel on your Accountability Chart, and any changes to your core pricing strategy. You should also explicitly exclude corporate overhead allocations or parent-company management fees from your earnout EBITDA calculation.

Maintain your weekly Level 10 Meeting structure during the earnout period. This keeps the leadership team focused on operational Rocks without interference. It also provides a clear, documented record of performance and decisions. If the buyer attempts to micromanage your delivery or alter your cost structure, you will have a clear trail of evidence. This will help you dispute any negative adjustments to your earnout.