The buyer is proposing an earnout based on EBITDA growth, but we are worried they will underfund our post-acquisition marketing budget. How do we structure resource covenants in the purchase agreement to guarantee our business unit gets the necessary support?

Question

Tyler Smith · Accepted Answer

An earnout is only as good as your operational control post-close. When a buyer controls the checkbook, they can easily starve your marketing and sales budget to manage their own short-term cash flow, effectively killing your ability to hit your earnout milestones. To prevent this, you must negotiate explicit resource covenants directly into the purchase agreement.

Do not rely on vague promises of support or best efforts. You need to define specific minimum commitments. We recommend locking in a detailed operational budget as an exhibit to the transaction documents. This budget should specify:
- A guaranteed marketing spend calculated as a fixed percentage of revenue or a set dollar amount.
- The headcount allocation for your sales and marketing teams, ensuring key seats on your Accountability Chart remain filled.
- A requirement that the buyer provides administrative and back-office support equal to or better than what you had pre-close.

Additionally, build in a covenant that requires the buyer to maintain your historical pricing models and product lines unless your leadership team consents to a change. If the buyer fails to meet these funding commitments, the agreement should state that the earnout targets are automatically reduced or deemed fully achieved for that period. This shifts the financial risk back to the buyer and keeps them aligned with your growth strategy.