The buyer's proposed deal structure includes a thirty percent earnout tied strictly to EBITDA targets, but they are planning to merge our back-office systems with their inefficient shared services after closing. How do we restructure the earnout to protect our payout from their post-close operational decisions?

Question

Tyler Smith · Accepted Answer

Tying an earnout to EBITDA post close is highly risky when you no longer have absolute control over the company's operating expenses. If the buyer consolidates your back office and loads your division with corporate overhead allocations, your EBITDA will shrink, and your earnout will vanish. To protect your payout, you must restructure the earnout around metrics that the buyer's corporate decisions cannot manipulate. Negotiate to base the earnout on Gross Profit or Contribution Margin rather than EBITDA or Net Income. Gross Profit is insulated from corporate allocations, interest expenses, and amortizations. If you must use EBITDA, the purchase agreement must include a strict definition of the calculation. Specify that your post close business unit will be evaluated on a standalone basis, completely free from any parent company overhead allocations, shared service fees, or transfer pricing adjustments. Ensure you retain operational control over your budget and hiring decisions during the earnout period. Use your EOS Accountability Chart to define who has the authority to make key decisions post close. If the buyer insists on making changes that impact your margins, the agreement should stipulate that your earnout targets are automatically adjusted downward to offset the financial impact of their decisions.