That we are at an attention grabbing point in our economic history is no novel observation on my part. Yet this presents some interesting dynamics to the estimated 10 to 12 million SMBs that are forecast to sell over the next 10 to 15 years.
Some of these businesses that would like to sell may not be at the top of their game at this time. It’s no trade secret that buyer’s will value your company based upon current earnings — not 5 years ago. Yet for some of these businesses the near term upside is high – you don’t want to leave that on the table.
Many times Earnouts – contingent consideration to the seller for hitting agreed thresholds, most typically sales, operating income, net income – can close the deal. Often this is a win-win. You can bridge the gap between the offered price and “your price”. The buyer has mitigated their risk in that they are not paying on futures that might not occur. You haven’t left money on the table. Earnouts, obviously, can promote the interests of a seller who may be interested in selling but would like to phase him or herself into the golden years.
Some words of caution, one opinion, one very real:
Opinion – I would never agree to an Earnout if I were selling my business and I was not involved in the business for the duration of the Earnout timeframe with principally the same authority as I had prior to sale.
Real – Particularly if your Earnout is based upon gross margin, operating income, EBIT, EBITDA, net income be very careful, VERY CAREFUL addressing any and all changes or chargebacks the buyer may be looking to “assign” to your business. These “new expenses” can run the gamut but include: relocation, rent, benefits, buyer’s salaries, marketing, other overhead, the proverbial “corporate overhead charge”, “disallowed revenues” and the like. YOUR Earnout should be based upon how you ran your company not the new owners. I’ll gladly share war stories – just not here. Get good advice.
Lastly, you’ve been the boss for some time, if you sell and will continue to be involved with or without an Earnout you now have a boss, likely multiple bosses …. that is no mean adjustment. Talk to others who have sold, experts, coaches, everyone you can whose been through it before. You’ll thank me later.