The buyer is insisting on a post-close earnout based on our future EBITDA targets, but we are worried about how they will allocate overhead and corporate expenses. How do we push back and structure the earnout around gross profit instead?

Question

Tyler Smith · Accepted Answer

Never agree to an earnout tied to EBITDA or net income if you can avoid it. Once the buyer takes control, they can easily manipulate your net margin by allocating corporate overhead, hiring expensive parent-company staff, or changing accounting methods. This can wipe out your earnout even if your sales skyrocket. Instead, fight to structure the earnout based on gross profit or net revenue. Gross profit is a much safer operational metric because it is harder for a buyer to manipulate. It reflects your true delivery efficiency and sales volume without being tainted by post-close corporate allocations. If the buyer insists on EBITDA, you must negotiate strict protective covenants. These covenants must define exactly how corporate overhead is allocated, limit the buyer's ability to charge management fees, and prevent them from changing your operational structure. Your EOS accountability metrics can serve as the baseline for tracking these costs. Ensure your purchase agreement outlines these rules in detail to prevent the buyer's management team from shifting expenses to your division.