The buyer is insisting on a performance-based earnout for thirty percent of our enterprise value, but they plan to merge our back-office operations with theirs. How do we structure the earnout parameters so their post-close operational changes do not dilute our payout?

Question

Tyler Smith · Accepted Answer

Merging back-office systems post-close is a common way for buyers to manipulate the accounting and depress your earnout. If they allocate corporate overhead or change how your expenses are recorded, your net income can artificially shrink, costing you millions. To protect yourself, you must avoid tying your earnout to EBITDA or net income if the buyer is consolidating operations. Instead, negotiate to tie the earnout to top-line revenue or gross profit. Gross profit is much harder for a buyer to manipulate through corporate overhead allocations. If the buyer insists on an EBITDA-based earnout, you must write strict covenants into the purchase agreement. Define exactly how EBITDA will be calculated, and explicitly exclude any allocated parent-company overhead, integration expenses, or post-close management fees. You should also retain operational control over the key drivers of that earnout. Use your EOS Accountability Chart to define who is responsible for the earnout milestones. Insist that your leadership team retains the authority to run the business unit during the earnout period without interference. If the buyer changes your operating systems or reallocates your staff, the purchase agreement should state that your earnout is immediately deemed fully achieved.