Private Equity Monitoring Fees: What Sellers Need to Know About Their Impact on Earnout EBITDA

When a private equity (PE) firm acquires a business, it’s not uncommon for them to charge the acquired company “monitoring fees.” While these fees may seem like standard practice from the PE firm's perspective, they can come as an unwelcome surprise to sellers—especially when the deal involves an earnout tied to EBITDA performance. Understanding how these fees work and how they can affect your post-sale compensation is essential for protecting your interests.

What Are Monitoring Fees?

Monitoring fees are payments made by the portfolio company (i.e., the acquired business) to the private equity firm for ongoing advisory and oversight services. These can include:

• Strategic guidance

• Financial oversight

• Operational support

• Regular performance reviews

Fees often range from hundreds of thousands to several million dollars annually, depending on the size of the company and the PE firm’s standard structure.

The Hidden Impact on Earnout EBITDA

Here’s where it gets tricky: monitoring fees reduce EBITDA. Since earnouts are frequently based on achieving EBITDA targets post-sale, these fees although not tied to company performance can lower reported EBITDA and make it harder to hit your earnout benchmarks.

For example:

• Let’s say your business was sold with an earnout tied to hitting $5 million in EBITDA annually for three years.

• The company hits $5.2 million in operational EBITDA, but the PE firm charges a $500,000 monitoring fee.

• Reported EBITDA drops to $4.7 million—below the earnout threshold—and you miss out on the earnout payment.

This structure can result in a conflict of interest, where the buyer (the PE firm) has both the power to charge fees and the incentive to reduce or eliminate earnout payments.

Are Monitoring Fees Negotiable?

Yes—and they should be.

Sellers (and their advisors) can and should negotiate earnout language to either:

1. Exclude monitoring fees from EBITDA calculations, or

2. Cap allowable add-backs or adjustments, or

3. Define EBITDA based on historical accounting practices, thereby eliminating post-sale surprises.

The goal is to preserve the spirit of the earnout to reward the seller for performance, not to create a hidden discount for the buyer.

What to Watch Out For in the LOI and Purchase Agreement

Monitoring fees may not be explicitly outlined in the Letter of Intent (LOI), but they often show up later in the Purchase Agreement or as part of the new company’s post-acquisition operating budget.

Key tips:

• Insist on clarity up front: If an earnout is involved, ensure the LOI defines how EBITDA will be calculated and whether any “management fees” will impact it.

• Push for “pro forma” EBITDA: Define EBITDA as it was historically calculated—pre-sale—without new fees baked in.

• Work with an experienced advisor: A good M&A attorney or business broker can flag language that puts your earnout at risk.

Final Thoughts

Monitoring fees are a common tool used by private equity firms to generate revenue from their investments, but they can have major implications for sellers with performance-based earnouts. The good news is that with proper planning, these fees can be anticipated, accounted for, and negotiated.

At Golden Shield Business Brokers, we help sellers navigate these kinds of deal terms, so they get the full value they deserve not just at closing, but throughout the life of the deal.

Let me know if you want to add a real-life example, client story, or expand on negotiation strategies.