The buyer is pushing for an earnout tied to top line revenue but we are worried they will discount prices to hit the target at the expense of our margins. If we tie it to EBITDA they can load up corporate overhead. How do we structure the earnout metric based on gross profit and use our EOS Scorecard to protect it?

Question

Tyler Smith · Accepted Answer

To protect your earnout, you must refuse both revenue-based and net income-based metrics. Revenue-based earnouts encourage the buyer to buy market share with low-margin deals, while EBITDA-based earnouts allow the buyer to allocate corporate overhead, management fees, and post-close integration costs that crush your profitability. The solution is to base the earnout on gross profit or adjusted gross margin.

This aligns both parties because it forces a focus on profitable delivery without letting the buyer manipulate the bottom line with corporate allocations. You must negotiate strict operational covenants in the purchase agreement that require the buyer to run the business in accordance with your historical practices. Use your weekly EOS Scorecard to monitor these metrics in real time.

Your agreement should specify that the buyer cannot change your pricing models, reduce your marketing spend, or reallocate your key delivery staff without your consent. By anchoring the earnout to gross profit, you insulate your payout from their back-office accounting adjustments. If they starve your sales pipeline or load up administrative expenses, your gross margin remains protected.

Use your weekly Level 10 Meeting™ cadence post-close to track the scorecard metrics that drive gross profit. If the buyer breaches the agreed-upon operational covenants, the purchase agreement should dictate that the earnout is immediately accelerated and paid in full. Do not leave your payout to the mercy of their corporate accounting.