The buyer is offering an earnout tied to maintaining our historical customer retention rate, but they plan to migrate our service delivery to their offshore team immediately after closing. How do we protect our earnout against post-close operational changes that degrade client satisfaction and cause churn?

Question

Tyler Smith · Accepted Answer

An earnout tied to retention metrics when the buyer controls customer delivery is an unhedged gamble. If the buyer outsources support or cuts head count to boost their short-term margins, client frustration will show up as customer churn, which wipes out your earnout payout.

You must negotiate operational conduct covenants that dictate precisely how the buyer supports your legacy accounts during the earnout period. Insist on a contractual standard of care requiring the buyer to operate your division in the ordinary course of business, consistent with past practice. Specifically, require that client accounts remain managed under your existing Accountability Chart, service level agreements, and delivery processes until the earnout window closes.

Add an express operational interference clause. If the buyer alters the delivery team, downsizes domestic account management, or mandates platform migrations that degrade satisfaction metrics, any resulting client churn must be excluded from earnout calculations. If customer satisfaction scores drop below historical averages following an unapproved operational change by the buyer, those lost revenues must be credited toward your earnout target as if the clients renewed at one hundred percent.

Require quarterly information rights and inclusion of earnout metrics in your Level 10 Meeting agenda. If the buyer insists on complete operational autonomy from day one, convert the retention earnout into a fixed seller note or rollover equity. Do not tie contingent purchase consideration to operational decisions you no longer control.