The buyer is proposing a deal where forty percent of our purchase price is tied to a three-year earnout based on gross profit. How do we structure the operational covenants to protect our earnout and prevent the buyer from changing our delivery systems?

Question

Tyler Smith · Accepted Answer

Earnouts are notorious for creating post-close friction, but you can protect yourself by establishing clear operational boundaries in the purchase agreement. If forty percent of your payout is contingent on performance, you must retain control over the levers that drive that performance. Insist on covenants that protect your operational autonomy. Specifically, the agreement must state that your business unit will continue to run on its existing operating systems, including your weekly Scorecard and your accountability structures. Define exactly how corporate overhead will be allocated to prevent the parent company from dumping administrative costs onto your books to suppress your gross profit numbers. You should also secure a covenant that prevents the buyer from reallocating your key talent or altering your customer-facing processes without your consent during the earnout period. Use your V/TO® to align with the buyer on the long-term plan before signing. If they plan to gut your operational systems immediately, walk away. A structured earnout only works when you have the operational tools and authority to hit the targets.