An investment banker is structuring an earnout for the acquisition of a software company. The seller insists on revenue-based earnout metrics, while the buyer prefers EBITDA-based metrics. Which of the following best explains why the seller would prefer revenue over EBITDA?

Why B — Revenue is harder than EBITDA for buyer to manipulate through expense allocation

Revenue is generally a more objective metric that is harder for the buyer to manipulate post-closing. EBITDA can be significantly affected by the buyer's decisions regarding expense allocation, corporate overhead charges, personnel changes, and accounting policies applied to the acquired business. The buyer could reduce the acquired business's EBITDA by loading it with corporate allocations or transferring costs to it. Sellers therefore often prefer top-line metrics that are less susceptible to manipulation by the party that controls post-closing operations.