The buyer wants to tie a quarter of our transaction value to an earnout based on future EBITDA, but we are worried they will load the business with corporate expenses to suppress profitability. How do we structure the earnout triggers around operational or non-financial milestones instead?

Question

Tyler Smith · Accepted Answer

Tying an earnout to EBITDA is a classic trap that often results in paying a massive dumb tax. Once the buyer takes control, their corporate overhead, shared services, and new management hires will inevitably find their way onto your profit and loss statement, diluting your payout. To protect your hard-earned equity, shift the earnout metrics away from net profit and onto operational, volume-based milestone metrics that cannot be manipulated by creative corporate accounting. Look at your quarterly Rocks and your weekly scorecard. You can base the earnout triggers on clear, binary operational achievements. For example, tie the payouts to the number of active customer accounts maintained, contract renewals, total units processed, or the successful integration of your custom AI scheduling tool across their wider portfolio. If the buyer insists on a financial metric, push for top-line revenue or gross margin instead of EBITDA, with a strict contractual list of excluded corporate expenses. Ensure the purchase agreement explicitly states that the buyer must operate your business as a standalone division during the earnout period and cannot allocate any parent-company overhead to your operations. Use your leadership team's weekly Level 10 Meeting to review these earnout metrics just like you would review your company Rocks. This ensures complete visibility and keeps your team aligned on hitting the milestones without being blindsided by corporate accounting adjustments at the end of the year.