The Five Assumptions That Will Cost You Your Earnout
The wire hits. The lawyers shake hands. The champagne gets opened – metaphorically, at least, because your new PE partners don’t really do champagne.
And then Monday morning arrives. You walk into the business you built, with the title you negotiated, ready to continue the journey. Except something feels different. Decisions are taking longer. There are more people in the room. The operating partner is asking questions you weren’t expecting.
This is where the real deal begins. Not the one in the SPA. The one nobody put in writing.
The relationship between a founder and their PE firm post-close is one of the most consequential – and most misunderstood – dynamics in business. Get it wrong and you don’t just lose the relationship. You lose the earnout. Millions of dollars you were counting on.
What drives that deterioration almost always comes back to the same thing: the founder made assumptions the PE firm never shared.
So before we get to the assumptions, you need to understand the incentive structures driving the behaviour of the people now sitting across the table from you.
How PE Firms - and the People Inside Them - Are Actually Measured
At a fund level, PE firms are evaluated on three metrics.
IRR (Internal Rate of Return) is the most important. It measures the speed and size of return. A 3x return over seven years is dramatically less valuable than a 3x return over three years. This is why PE firms move fast. Time destroys IRR.
MOIC (Multiple on Invested Capital) is what deal partners brag about. A 5x, 6x, 7x MOIC is the number on the scoreboard. It’s what gets talked about at the fund’s annual meeting and what drives the firm’s ability to raise its next fund.
DPI (Distributions to Paid-in Capital) measures how quickly a fund is returning actual cash to its investors. Unrealised gains are academic. DPI is reality.
Now understand how individuals inside a PE firm are compensated. The partners and deal managers earn management fees and carried interest – typically 20% of profits above the fund’s hurdle rate. Their personal wealth creation is directly tied to fund performance. Every investment they oversee needs to generate exceptional returns, or their carry is worthless.
The operating partner – the person you’ll interact with most post-close – is measured on how effectively they implement the value creation plan across their portfolio. Their job is to de-risk the investment and accelerate the timeline to exit.
Here’s what this means in practice: every decision your new partners make after close is filtered through one question. Not “does this help the founder?” … but “does this improve our exit multiple and compress the time to realise it?”
That is not a criticism. It’s the system. It’s the game. And if you don’t understand it, you’re walking into the post-close period completely unprepared.
The Five Fatal Assumptions
Assumption 1: “They bought my business because they believe in how I run it”
They believe in your cash flows. They believe in your market position and growth thesis. They believe in the asset – which is not the same as believing in your operating philosophy.
From Day 1, their job is to install their model. Faster reporting. Tighter governance. More rigorous unit economics. This isn’t a vote of no confidence. It’s the playbook they apply to every investment. The mistake is taking it personally … and then getting defensive at the exact moment you need to be collaborative.
Assumption 2: “My earnout targets are fair because we agreed them”
You agreed the targets. But post-close, the firm controls the resource allocation, capex decisions, hiring approvals, and strategic priorities that determine whether you hit them.
This is the trap. An earnout agreed in good faith at signing can become structurally almost impossible to hit once the operating model is installed – not through bad intentions, but because the decisions that serve their 5-year exit thesis don’t always align with what you need in the next 24 months. If you didn’t negotiate resource protection pre-close, you’re exposed.
Assumption 3: “We’re aligned because we both want the business to grow”
You want to hit your earnout in 24 months. They want to maximise their exit multiple in 4-5 years. These are not the same objective, and they diverge constantly.
A decision that serves their long-term multiple – heavy investment in a new product line, a bolt-on acquisition, a platform replatforming – might be exactly the wrong thing for your short-term EBITDA targets. You’ll both think you’re being reasonable. You’ll both be right. And you’ll both lose the relationship in the friction.
Assumption 4: “The operating partner is there to help me”
Let me be direct here, because I was the operating partner. Multiple times.
When I walked into a portfolio company post-close, I genuinely wanted a strong personal relationship with the founder or CEO. I brought radical candor, full transparency, and real investment in their success. If you were performing, we’d be at the wine bar on Friday evening, talking about the business, trading war stories, building something together. I meant that. It wasn’t made up.
But my loyalty was with the firm. Always. That was the arrangement – and it was an honest one.
If you weren’t performing, it was my job to put you on notice. And if notice didn’t work, it was my job to recommend your replacement to the board. Quickly, and without sentiment. The relationship was real. The consequence of underperformance was equally real.
Founders who understand this dynamic use it well. They treat the operating partner as a genuine sounding board, get ahead of problems early, and never let the relationship deteriorate through silence or defensiveness. Founders who confuse warmth with unconditional loyalty find out – usually too late – that they misread the room.
Assumption 5: “If I perform, the relationship stays strong”
Performance is necessary. It is not sufficient.
Founders who hit their numbers but resist the governance model, push back on reporting cadence, make unilateral decisions outside their agreed lane, or create friction in the board relationship get marginalised regardless of results. PE firms measure cultural fit with their operating model as carefully as they measure financial performance – they just don’t tell you that in the deal process.
The founders who thrive post-close are the ones who deliver the numbers AND adapt to the structure. Both. Not one or the other.
Three Things to Agree Before You Sign
None of the above is inevitable. But protecting yourself requires doing the work before the deal closes – not after.
1. Resource protection on earnout-affecting decisions
If your earnout is tied to EBITDA, you need contractual protection against post-close decisions that materially increase your cost base without your agreement. Get a clause in the SPA – or a side letter – that requires your written consent for any capex or overhead commitment above a defined threshold that affects the earnout period P&L. This is not unusual to ask for. Any PE firm worth working with will negotiate it in good faith.
2. Defined operating partner scope and escalation process
Before close, ask explicitly: what decisions does the operating partner have authority to direct, and what requires full board approval? Get this documented. The ambiguity around operating partner authority is where the relationship most commonly breaks down. Clarity protects both sides, and any PE firm that resists defining this clearly is signalling something worth paying attention to.
3. A formal review mechanism at 90 days
Negotiate a structured 90-day review into the deal – a formal session where both parties assess whether the operating model being installed is compatible with the earnout targets. This creates a legitimate forum to raise misalignment before it becomes irreversible, rather than letting friction accumulate in silence until someone picks up the phone to a lawyer.
So the big takeaway here? The wire hitting is not the finish line. It’s the start of a different and considerably more complex game.
Most founders lose earnout value not because they didn’t work hard enough post-close, but because they walked in with assumptions their PE partners never shared, and nobody corrected them until it was too late.
The advantage goes to founders who understand the incentive structures driving the other side’s behaviour. Know their game. Then protect yourself accordingly, in writing, before you sign.
What’s Next?
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