The buyer is offering a high valuation but wants 40 percent of it tied to a three-year earnout. How do we structure the operational covenants in the purchase agreement so they do not starve our resources or change our service delivery model post-close?

Question

Tyler Smith · Accepted Answer

An earnout is often a bridge to close a valuation gap, but it is also a minefield for an owner. When 40 percent of your purchase price is tied to future performance, you cannot afford to cede operational control. The buying entity will naturally want to integrate operations, which often means dismantling your systems. To protect your earnout, you must negotiate strict operational covenants in the purchase agreement.

First, mandate that the buyer must run your division as a separate, stand-alone business unit during the earnout period. They must provide a dedicated budget for marketing, sales, and operations that matches or exceeds your historical run rate. Second, secure a covenant requiring the buyer to act in good faith and prevent them from taking any action with the primary intent of minimizing your earnout payments.

Third, establish that if the buyer breaches these covenants, relocates your team, or changes your core operating system, the earnout is triggered immediately and paid in full. You must also tie the earnout metrics to top-line revenue or gross margin rather than net income. This protects you from the buyer loading your P and L with corporate overhead allocations, shared service fees, or high executive salaries. Keep your leadership team focused on their weekly Rocks and Level 10 Meeting rhythms during this transition. This ensures operational consistency and prevents the integration process from derailing the performance targets required to secure your payout.