The buyer wants our earnout structured around post-closing net profit, but we are worried their corporate overhead allocations and operational changes will wipe out our bottom line. How do we structure the earnout metrics to protect our payout?

Question

Tyler Smith · Accepted Answer

An earnout can easily turn into a disaster if it is structured around metrics that the buyer can manipulate post-close. If a buyer insists on an earnout tied to net profit, you must push back. Corporate buyers are notorious for shifting overhead, management fees, and parent-company expenses onto the acquired company's books, quickly erasing your apparent profitability.

To protect your payout, structure the earnout metrics around gross profit or top-line revenue. These figures are much harder to alter through accounting tricks. If the buyer insists on using EBITDA, write strict definitions into the purchase agreement. Explicitly exclude any allocated corporate overhead, parent-company tax liabilities, or capital expenditures that you do not personally approve.

Additionally, secure operational covenants in the purchase agreement. You must maintain the authority to manage your team using your established EOS frameworks. Your leadership team must retain the ability to execute their Rocks and run their weekly Level 10 Meeting without corporate interference. If the buyer strips your team's GWC, or changes the Accountability Chart so you no longer control delivery, the earnout targets must adjust downward automatically. Never sign an earnout without these operational and accounting guardrails in place.