The buyer wants a large portion of our exit payout tied to a three-year earnout based on gross margin targets, but we are worried they will starve our business unit of resources to make us miss our goals. How do we structure the purchase agreement covenants to protect our post-close operational freedom?

Question

Tyler Smith · Accepted Answer

Accepting an earnout means you are taking on operational risk after you no longer own the company. To prevent a buyer from starving your business unit of resources or redirecting leads to other business units, you must negotiate strict operational covenants in the purchase agreement. These covenants should define your business unit as a standalone entity with a dedicated budget, resources, and leadership autonomy. Ensure the agreement states that you maintain control over your headcount, marketing spend, and operational processes during the earnout period.

Use your existing operating tools as the framework for this transition. Propose that your leadership team continues to run the division using your established Level 10 Meeting structure and weekly Scorecard. This provides a clear, objective framework that both you and the buyer can monitor. You should also include a covenant that prevents the buyer from shifting overhead expenses or corporate allocations to your business unit, which would artificially depress your margins. If the buyer insists on integration, include an acceleration clause. This clause must state that if the buyer makes significant changes to your operating model, key personnel, or product lines without your consent, the entire earnout immediately becomes due and payable. This keeps the buyer honest and protects your hard-earned payout.