The prospective buyer insists on a three-year earnout tied to company EBITDA, but they plan to consolidate back-office operations and assign corporate management fees to our business post-close. How do we ring-fence our earnout calculation to prevent corporate overhead allocations from wiping out our payout?

Question

Tyler Smith · Accepted Answer

Never accept an earnout calculated on bottom-line GAAP EBITDA when the buyer controls corporate accounting post-close. The moment an acquirer consolidates human resources, accounting, software licenses, and executive management fees, your standalone EBITDA becomes an arbitrary number controlled by their corporate finance department.

If you must accept an earnout, negotiate the target metric higher up the income statement. The cleanest structure is Contribution Margin or Gross Profit. Measuring earnouts on gross profit allows you to tie performance strictly to revenue and direct delivery costs, completely insulating your payout from corporate overhead, executive management fees, and shared services.

If the buyer refuses and demands an EBITDA metric, you must negotiate strict operational covenants and accounting definitions in the definitive purchase agreement:

- Zero corporate overhead allocation: Explicitly exclude all parent company shared services, management fees, transaction advisory expenses, and goodwill amortization from the post-close EBITDA calculation.
- Consistent historical accounting: Mandate that post-close earnings are calculated using the exact same revenue recognition and expense capitalization methodologies applied in your pre-close financials.
- Operational autonomy covenants: Protect your resource allocation. Ensure the buyer cannot slash marketing budgets, terminate key delivery seats identified on your Accountability Chart, or redirect inbound sales leads to their sister companies.
- Independent audit rights: Require annual audit rights by an agreed neutral third-party accounting firm, with the buyer paying audit fees if they understate EBITDA by more than three percent.

Do not rely on verbal assurances. Protect the earnout through legal covenants before signing.