The buyer is offering a large earnout tied to net income, but we are worried their corporate overhead allocations will wipe out our profits post-close. How do we structure the earnout metrics to align with our weekly Level 10 Meeting Scorecard to ensure we get paid?

Question

Tyler Smith · Accepted Answer

Never accept an earnout based on net income or any metric down the profit and loss statement that a buyer's corporate accountants can manipulate with shared service allocations, corporate overhead, or parent debt interest. If you do, you are giving up operational control while letting them hold your money hostage.

Instead, tie your earnout metrics directly to operational leading indicators that you track weekly in your Level 10 Meeting™. These must be top-line or gross-margin metrics that are hard to manipulate. Focus on numbers like gross revenue, unit volume, or customer retention rates.

We recommend establishing these rules in the purchase agreement:
- The earnout must be calculated based on gross profit before any parent-level administrative or overhead allocations.
- Your leadership team must retain operational control over the specific Rocks and budget required to hit these targets.
- You must have audit rights to review the books quarterly.

By aligning the earnout metrics with your existing EOS® Scorecard, you maintain a single source of truth. If a metric is clean enough to run your weekly operations, it is clean enough to govern your earnout. This keeps the buyer's hands out of your operational kitchen and guarantees that your post-close hard work translates directly into your final payout.