The buyer is offering a high headline valuation but wants to structure a large portion of it as an earnout based on post-close EBITDA, which they can easily manipulate. How do we restructure the earnout metric to protect our payout?

Question

Tyler Smith · Accepted Answer

Structuring an earnout based on post-close EBITDA is highly risky for a seller. Once the transaction closes, the buyer will control the business and can easily integrate corporate overhead, allocate shared management fees, or make strategic investments that artificially depress your EBITDA, destroying your earnout payout.

To protect your position, negotiate to base the earnout on Gross Margin or Gross Profit rather than EBITDA. These top-line metrics are much harder for a buyer to manipulate through accounting adjustments or corporate allocations. Explain to the buyer that this structure aligns perfectly with the growth goals outlined in your V/TO®, keeping your transition team focused on driving high-margin revenue.

Use the principles of IVS 105 to demonstrate that Gross Margin is a more accurate measure of the post-close value creation and operational efficiency of your product or service. Prove that your leadership team has direct control over gross margins through systemized cost controls and pricing strategies, which are managed weekly on your EOS® Scorecard.

By proposing a Gross Margin earnout, you protect your payout from corporate overhead allocations while still giving the buyer the performance-based security they desire. This structure keeps both parties aligned on scaling the core business profitably during the transition period.