The buyer wants to bridge a gap in our valuation by structuring forty percent of the deal as a three-year earnout based on net income, but we are worried their corporate overhead charges will destroy our profitability. How do we structure this earnout to protect our payout?

Question

Tyler Smith · Accepted Answer

Tying an earnout to net income or EBITDA is a massive risk because post-close expenses are incredibly easy for a buyer to manipulate. Once they take control, they can load up your business unit with corporate overhead allocations, expensive shared services, and new management salaries, wiping out your net profitability on paper.

To protect your payout, you must negotiate to tie the earnout to gross revenue or gross profit instead of net income. Gross revenue is much harder to manipulate. If the buyer absolutely insists on a net income metric, you must write strict operational and accounting protections into the purchase agreement. Insist on a covenant that prevents them from allocating any parent company overhead to your division for the duration of the earnout. Furthermore, secure veto rights over any major changes to your operating model, hiring decisions, or pricing strategies. Keep your team operating on your established EOS scorecard so you can track your progress clearly and prevent any post-closing operational interference from sabotaging your targets. You must maintain structural control over the levers that drive your payout.