The buyer wants to structure our earnout based solely on post-acquisition EBITDA, but we are worried their corporate overhead allocations will wipe out our profitability. How do we structure the earnout metrics around operational milestones we actually control?

Question

Tyler Smith · Accepted Answer

Never accept an earnout tied strictly to bottom-line net income or EBITDA if the buyer will control the accounting department post-closing. Once they take over, they can allocate corporate overhead, parent company management fees, and shared services costs directly to your profit and loss statement, easily wiping out your earnout targets.

Instead, negotiate an earnout based on top-line revenue, gross margin dollars, or non-financial operational milestones. If they insist on using EBITDA, you must include tight accounting covenants in the purchase agreement. These covenants should explicitly state that no corporate overhead, parental allocations, or transaction-related expenses can be charged against your business unit for the purpose of calculating the earnout.

We recommend tying earnout milestones to operational Rocks that you can directly control. For example, use metrics like customer retention rates, user adoption counts, or specific product development milestones. By anchoring the earnout in clean, objective operational metrics rather than easily manipulated financial accounting entries, you protect your upside and ensure you actually get paid for the value you deliver post-close.