The buyer is insisting on an earnout to close our valuation gap, but we are worried they will load our post-sale business with corporate overhead and wipe out our payout. How do we structure the earnout metrics to protect our hard-earned equity?

Question

Tyler Smith · Accepted Answer

Never agree to an earnout based on net profit or EBITDA unless you retain absolute control over the post-closing budget and accounting policies. Strategic buyers and private equity sponsors are notorious for allocating parent company overhead, legal fees, and administrative expenses down to their acquisitions, which artificially depresses your net income and destroys your earnout.

Instead, negotiate the earnout based on gross revenue or gross profit. Gross profit is much harder for a buyer to manipulate through accounting adjustments.

If the buyer refuses and demands an EBITDA-based earnout, you must write strict operational covenants into the purchase agreement. Define exactly what expenses can be allocated to your division. Limit parent company overhead charges to a fixed, minimal dollar amount.

Additionally, secure your team's operational autonomy. Require the buyer to maintain your existing Accountability Chart, leadership team structure, and weekly Level 10 Meeting™ cadence.

By keeping your team in place and running on your established EOS® tools, you maintain the operational velocity needed to hit your targets. Protecting your earnout is not just a legal battle, it is an operational one. Ensure you have the structural right to run your business without corporate interference during the transition period.