LegalDeal Structure
Earnout Operating Covenant
Also known as: Earnout protection covenant, anti-manipulation provision, operating covenant
A contractual protection preventing the buyer from taking operational actions — account transfers, overhead allocations, revenue redirection — designed to suppress earnout performance.
WHY IT MATTERS
Earnouts are contingent payments tied to post-close performance targets. The problem is the buyer controls the business after closing — including the decisions that determine whether those targets get hit. Without an earnout operating covenant, a buyer can redirect revenue to affiliates, allocate overhead from other portfolio companies, or extract management fees that didn't exist when the founder ran the business. Each action is legitimate under most purchase agreements. Each one suppresses the EBITDA figure the earnout is measured against. An earnout operating covenant prohibits these specific maneuvers, requiring the buyer to run the business consistent with historical practices for the duration of the earnout period.