The buyer is offering a high headline enterprise value but wants thirty percent of it structured as a three-year earnout based on gross margin. How do we structure this so we do not get screwed by their post-closing corporate overhead allocations?

Question

Tyler Smith · Accepted Answer

Never agree to an earnout tied to net income or EBITDA because the buyer can easily manipulate these numbers with corporate overhead allocations, management fees, and shared service expenses. Instead, anchor your earnout strictly to gross profit or top-line revenue.

If the buyer insists on a margin-based metric, you must explicitly negotiate what can and cannot be deducted from revenue to calculate that margin. Draft a tight, closed-loop accounting definition in the purchase agreement that completely excludes any parent company allocations or centralized IT, human resources, and legal fees.

Furthermore, you need operational control during the earnout period. If you do not have the authority to hire, fire, spend budgeted marketing dollars, or run your Level 10 Meeting schedules, you cannot be held responsible for the financial targets. Define your post-closing operational boundaries in the deal terms.

Your Accountability Chart should clearly show who has the authority to make day-to-day decisions without corporate interference. If the buyer demands veto power over basic operational decisions, then that portion of the purchase price should be paid upfront. An earnout is a tool to bridge a valuation gap, not a license for the buyer to run your business with your hands tied behind your back while you carry all the financial risk.

AI never sits in the room. It works before the Level 10 Meeting to prep the data and after the meeting to capture and track what was decided. The 90 minutes stay human: your leadership team, the scorecard, the issues list, and the IDS conversation.