I am negotiating an acquisition that includes a three-year earn-out period based on post-sale EBITDA targets. How do we structure our operational governance and scorecards today so the buyer cannot manipulate our resource allocation and prevent us from hitting those earn-out goals?

Question

Tyler Smith · Accepted Answer

An earn-out can be a lucrative way to capture the full value of your business, but it carries significant risk if the buyer alters your operations post-sale. To protect your earn-out, you must negotiate and secure clear operational governance rules before you sign the final purchase agreement.

Under the Income Approach, your earn-out is tied directly to future cash flows and EBITDA targets. To ensure these targets remain achievable, your operational agreements must protect your company's operating system.

Specifically, you must contractually mandate:

- The remaining leadership team retains control over the daily Accountability Chart and hiring decisions required to execute the business plan.

- The buyer cannot arbitrarily reallocate shared corporate overhead expenses or parent-company debt to your subsidiary's financial scorecard.

- The core operational Rocks and strategic priorities outlined in your V/TO remain the guiding framework for the business during the earn-out period.

By tying your earn-out protections to your existing operational structure, you prevent the buyer from making structural changes that would artificially depress your reported earnings. This ensures that the team you built retains the operational autonomy needed to hit the performance metrics and secure your full payout.