The buyer is proposing a three-year earnout based on our post-sale EBITDA performance, but our Visionary wants to step back from operations immediately after the transaction closes. How do we structure the deal so we can protect our earnout payout even if we are no longer running the daily business?

Question

Tyler Smith · Accepted Answer

Relying on an EBITDA based earnout when your Visionary is exiting the business is incredibly risky. Once you step out of the daily operations, the buyer can easily manipulate your post-sale EBITDA by loading your division with corporate overhead, shifting expensive shared services to your books, or making poor hiring decisions that drag down your profitability.

If your Visionary is exiting, you must negotiate clear operational covenants in the purchase agreement. First, demand that the earnout be calculated on top-line revenue or gross margin rather than net EBITDA. Top-line metrics are much harder for a buyer to manipulate through accounting allocations.

Second, if the buyer insists on EBITDA, secure a safe harbor clause that limits corporate overhead allocations to a fixed, low percentage of revenue.

Third, maintain governance rights over your leadership team. Your current Integrator must retain the authority to run the business using your established operating system. Ensure the purchase agreement explicitly protects your team's right to run their weekly Level 10 Meeting and maintain their own Accountability Chart without corporate interference. This keeps your operating team focused on hitting the milestones that secure your payout.