The buyer is proposing a substantial earn-out based on hitting aggressive post-close EBITDA targets, but we are worried they will starve our division of the capital and marketing support needed to hit those goals. How do we structure the earn-out to guarantee operational control and resource allocation?

Question

Tyler Smith · Accepted Answer

Agreeing to an earn-out without securing operational and financial covenants is a recipe for losing your money. Once the deal closes, the buyer controls the checkbook, and they can easily starve your division of resources to fund other initiatives, causing you to miss your targets. To protect yourself, you must negotiate a detailed operating covenant in the purchase agreement. This covenant must guarantee that the buyer will provide a baseline level of working capital, marketing budget, and headcount support. Tie these commitments directly to your V/TO® and your operational plan. Furthermore, insist on maintaining absolute operational control over your division during the earn-out period. Your leadership team must retain the authority to hire, fire, and execute daily operations. If the buyer breaches these operational covenants or fails to fund the agreed-upon budget, the agreement must include an acceleration clause that triggers an immediate full payout of the earn-out. Run these scenarios through your weekly Level 10 Meeting™ during the diligence phase. If the buyer is unwilling to commit to these operational guarantees in writing, you should assume the earn-out is a phantom payment and restructure the deal to secure more guaranteed cash at closing.