The buyer is offering our asking price but requires a thirty percent earnout tied to maintaining specific top-line recurring revenue targets over twenty-four months. Since we are stepping out of daily management, how do we structure the covenant package so their operational decisions cannot torpedo our payout?

Question

Tyler Smith · Accepted Answer

An earnout tied to revenue when you no longer hold the Integrator seat on the Accountability Chart is high risk unless you negotiate strict operating covenants. Once the buyer assumes control, their incentive is to optimize for their long-term operating model, which often means cutting sales expense, changing product pricing, or reprioritizing client accounts. Those decisions can easily depress the specific revenue streams you are being measured against.

First, tie the metric strictly to customer retention and contract renewals on your existing accounts rather than blended top-line growth. You cannot be responsible for new account acquisition if you do not control the sales team, marketing budget, or delivery capacity.

Second, write negative covenants into the purchase agreement. The buyer must agree to operate the business in the ordinary course consistent with past practice. Specifically, require that they maintain historical service levels, preserve existing client-facing compensation structures, and spend an agreed minimum on operational support. If they reassign your operational team or fail to fill key seats using GWC criteria, they breach the covenant.

Third, insist on an acceleration clause. If the buyer relocates operations, integrates your customer accounts into a shared parent company pool, or experiences a change of control during the earnout period, the earnout must immediately trigger as paid in full. Never agree to an earnout where the buyer has unchecked operational authority and no contractual penalty for starving your revenue base.