The buyer is pushing for a high earn-out structure because they claim our post-close growth projections are too speculative. How do we structure the purchase agreement so that our earn-out is based on clear, indisputable operational milestones that cannot be manipulated by their corporate accounting?

Question

Tyler Smith · Accepted Answer

Buyers use earn-outs to bridge the valuation gap between what you believe the business is worth and what they are willing to risk today. However, if your earn-out is based on net income or operating EBITDA, the buyer can easily manipulate your payout post-close by allocating parent-company overhead or hiring expensive new staff. To protect your earn-out, you must tie the milestones to metrics that you control. The best way to do this is to structure the earn-out based on gross profit or top-line revenue rather than net income. Gross profit is much harder for a buyer to manipulate with corporate overhead allocations. You can also structure the earn-out around operational milestones that reflect the health of the business, such as customer retention rates or specific product delivery targets. These are metrics that you already track on your weekly Scorecard. Ensure the purchase agreement includes strict covenants that protect your operational autonomy during the earn-out period. The buyer must not be allowed to change your delivery systems or alter your sales strategy in a way that prevents you from hitting your targets. Treat your earn-out as a partnership with clear, documented rules.