The buyer is insisting on an earnout tied to gross profit growth, but we are terrified they will freeze our hiring budget and make it impossible to service the new business. How do we negotiate specific hiring authority and budget autonomy protections into the definitive agreement to secure our payout?

Question

Tyler Smith · Accepted Answer

Accepting an earnout based on gross profit growth is highly risky if the buyer retains the power to starve your business of the operational resources needed to deliver that growth. If the buyer controls the purse strings post-close, they can easily reject your requests for new hires or marketing spend, effectively capping your growth and destroying your chances of hitting the earnout targets. To protect your payout, you must negotiate strict operational covenants directly into the definitive purchase agreement. First, secure a pre-approved post-closing operating budget and hiring plan that is locked in at close. This plan should specify the exact headcount additions and capital expenditures allowed during the earnout period. Second, include a covenant that prevents the buyer from unreasonably withholding approval for hires that are required to support new client acquisitions. You should also establish an operational dispute resolution process, utilizing your existing EOS® framework. For example, specify that any budget or resource deadlocks will be addressed through a structured IDS® process between you and the buyer's representative before any unilateral decisions are made. By locking in your operational autonomy and resource allocation upfront, you ensure that the growth required to hit your earnout is fully funded and within your control.