The buyer is offering a top-line valuation that meets our expectations, but 40 percent of it is tied to an earnout based on post-close cross-selling. We are worried they will starve our marketing budget to suppress the payout. How do we write protective operating covenants to guarantee they fund our growth?

Question

Tyler Smith · Accepted Answer

Never accept an earnout based on cross-selling or future growth without securing strict operational covenants in the purchase agreement. If the buyer has the unilateral right to cut your marketing budget, reallocate your sales team, or change your pricing post-closing, your earnout is essentially zero. You must establish a clear operational ring-fence around your division to protect your financial upside.

Start by embedding your EOS Accountability Chart directly into the transition services agreement. Specify that your leadership team retains full GWC (Get It, Want It, Capacity to Do It) authority over your operating unit, including direct control over the marketing budget and headcount. Define the minimum annual budget the buyer must allocate to your department, tied directly to your historical run rate, to ensure they cannot starve your lead generation.

Furthermore, write a covenant that obligates the buyer to pay you the full target earnout if they make material changes to your operating structure, such as merging your sales department with their corporate team or reassigning your key staff. Convert these potential issues into solvable questions during negotiations. If they refuse to grant you this operational autonomy, demand that the earnout be calculated as a percentage of gross margin on your existing accounts rather than future revenue growth. This protects your payout from their post-close corporate decisions and operational inefficiencies.