We are considering a structured earnout to bridge a two-turn multiple gap between our asking price and the buyer offer. How do we structure earnout metrics to ensure we actually collect the payout post-closing?

Question

Tyler Smith · Accepted Answer

An earnout is a promise of future payment contingent on the business hitting specific post-closing performance targets. While buyers pitch earnouts as a collaborative way to share future upside, in practice the majority of earnouts result in disputes, missed hurdles, or litigation. If you must use an earnout to bridge a valuation gap, you must structure the targets defensively.

Never tie an earnout to net income or bottom-line EBITDA. Once the transaction closes, the buyer controls the operational checkbook. They can load the business with shared corporate overhead allocations, inflated management fees, executive hiring costs, and accelerated investments that slash EBITDA while growing overall enterprise value. You will watch top-line revenue surge while your EBITDA-based earnout disappears entirely.

Tie earnout targets strictly to revenue, gross profit, or discrete volume units that cannot be easily manipulated by accounting games. Gross margin metrics protect the buyer against unprofitable sales while shielding you from discretionary corporate overhead costs.

In addition, write explicit operational covenants into the definitive purchase agreement. Require the buyer to operate the business in the ordinary course of business, maintain consistent marketing and sales budgets, and support the product line with adequate working capital. Include a clause stating that if the buyer relocates operations, shifts key customer contracts to an affiliate, or changes the core business model, the earnout immediately accelerates and becomes fully payable. Finally, establish an expedited, binding independent accounting arbitration process to settle disputes within sixty days without dragging you into costly civil litigation.