We have a significant valuation gap with the buyer, and they want us to accept a three-year earn-out based on profitability targets. How do we structure this deal so we do not lose control of our business or get cheated out of our payout?

Question

Tyler Smith · Accepted Answer

When you and a buyer disagree on the future earnings of your business, a valuation gap can stall your deal. Creative deal structures like earn-outs and seller notes are excellent tools to bridge this gap, but they must be structured carefully to protect your interests.

If the buyer proposes an earn-out, never agree to targets based on net income or EBITDA. The buyer can easily manipulate these numbers after closing by allocating corporate overhead to your business unit. Instead, base your earn-out targets on top-line revenue or gross margin, which are much harder to manipulate.

You must also secure strict post-closing operational covenants. Ensure the purchase agreement states that you maintain control over your day-to-day operations, marketing budgets, and hiring decisions during the earn-out period. If you accept a seller note to bridge the gap, negotiate a strong interest rate and secure the note with a personal guarantee or a pledge of the company shares. This keeps the buyer honest and ensures you actually collect your full valuation.