Insights & Info

Insights > How to Earn Your Earn-Out

How to Earn Your Earn-Out

By Generational Equity

Fast Earn Out

As we have highlighted in past posts, the creation of an “earn-out” to structure your exit can be a fundamental way to generate a significant return on your exit. However, if not structured wisely, it can also be a way for you to leave significant capital behind you.

How can you know the difference?

The best way is to hire a professional exit planning firm to represent you and protect your interests. If you don’t go that route, then you will need to be quite savvy and create an earn-out that protects you.

Our friends at Axial recently published an article on how to create an earn-out that protects and benefits you, because one of the basic tenants of any earn-out agreement is shared risk. The buyer shares the risk with you that the continuity of the company is ensured upon your eventual exit.

Entitled “The Fastest Way to Earn Your Earnout”, the article is full of great advice for those contemplating an earn-out structure.

In summary, they analyze the Pareto Principle. This is the concept that the economist Vilfredo Pareto established in 1906: The 80/20 rule. The 80/20 rule says 20% of the effort generates 80% of the reward. Think about that for a moment…

Where in your business does the greatest reward come from?

Analyzing your client base is critical in any earn-out equation. But you have to dig deeper than just customer concentration issues. As the folks at Axial put it:

The 80/20 rule in the B2B space is pervasive, but too often buyers and management teams think of concentration simply in terms of revenue by customer. What strategic buyers realize is that there is a much more strategic way to think about concentration, and that is by looking at the relationship between customer and product/service concentration.

Simply cutting customers or products and services without understanding the dynamic between the two will often do more harm than good. For example, your largest customer may buy your least profitable product, but without that product in the portfolio they establish a relationship with a competitor, risking wallet share.

I know that is quite a bit to chew on, but it is the question every seller must consider when even considering an earn-out with a buyer: Who gets the reward post-acquisition? How do you, the seller, ensure that your “high value” clients stay with your firm when you are gone? How does the buyer ensure that the clients who really create the most profit and/or have the most loyalty stay after you depart?

These are the hard questions that every earn-out has to answer. 

Have you ever done a deep dive into your client base? Not just to examine which clients are more profitable but also which ones are most loyal? And who are they loyal to? You the owner of the business or the company?

These are the salient questions that savvy buyers will ask of you during due diligence, and especially so if an earn-out is part of the equation. You must likewise examine them closely because if an earn-out is dependent on your 20 top clients being retained and they are all loyal to you personally, your earn-out could be similarly affected!

We know that these are not easy questions for business owners to ponder. But the stark reality is that you will be forced to examine them by buyers during due diligence – probably the most difficult part of the exit journey.

Because of this, we highly recommend that you have experienced exit planning advisors by your side long before you even consider an exit. This will not only protect you financially, it will help you grow your business STRATEGICALLY. Realize that there are ways to grow your business that build its value and others that have the opposite effect.

Knowing the difference from the viewpoint of a buyer is key.

The question is how can you learn to think like a buyer when you run your business on a daily basis? The tactical and strategic decisions you make this week, could have a big impact on the valuation of your business five years down the road.

Fortunately, we have a place for you to start your learning process. The Generational Growth and Exit Conferences have been designed to help business owners quickly and efficiently develop the tools necessary to not only think like buyers, but to understand the key decisions that need to be made on your journey to enhance your company’s value. 

To get started on your learning please use the following links:

And above all else, realize that in our current pandemic impacted world, the level of perceived risk has gone up on the part of all buyers. Earn-outs are becoming more and more useful as a way to share risk. Because of this, it is vital that you protect your interests!

Carl Doerksen is the Director of Corporate Development at Generational Equity.

© 2021 Generational Equity, LLC All Rights Reserved

Make an informed decision

The best decisions in life are informed decisions. We release educational business insights like this every week. Subscribe to make sure you don’t miss the latest news, views and analysis.


Success, you have been added to our list.

I couldn’t have asked for a better team than Michael and Deborah. We couldn’t have done it without them.
Robert Evans, President and CEO of Mealtracker Dietary Software
The help you provided us during each step of this process made us feel very comfortable and confident we were selecting the right approach to transition our Company.
Andy Graham, Vice President, Modern Heating & Plumbing
I wanted to write you a quick letter to express our appreciation and our delight on the outcome of helping us through the process of our recent sale. We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Terry D. Wickman, President, Keytroller
Generational Equity’s assistance was invaluable in compiling and marketing our business.
Bil MacLeslie, CEO, ipHouse
Tom Staszak is one of the most professional people I have dealt with in my last forty years of business. You’ve got a great group of people and you have built a truly professional organization.
Michael J Polarek, President, Paragon Packaging
We are very happy with the end result, and are very happy to be able to move forward with all of our future growth plans.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We thank you Eric and Generational Equity making our dream come true.
Larry Moore, Owner, A Company Portable Restrooms
I am pleased that I was able to work with Andrew Byrd throughout this experience. From the first meeting we had in Minneapolis I felt that I was in good hands. His knowledge and expertise is second to none. He guided the process consistently throughout. I feel lucky that I was pared with Andrew and could not be happier that I chose Generational Equity to handle this major life event. Thank you Andrew and GenEq for everything!
Eric Erlandson, Owner, Action Fastenings, Inc.
Bruce and I wanted to take this opportunity to thank Generational Equity for assigning Musa Jagne to our transaction. In Bruce’s words, “Musa did one hell of a job for us!”
Karen S. Williams, CFO, BW Manufacturing
Michael worked tirelessly, He followed every lead meticulously and urgently to make sure nothing was missed.
Robert Evans, President and CEO of Mealtracker Dietary Software
Thank you again for all your guidance and support. Any company will achieve what they intend, if they have you on their team!
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
We were happy to see the interest in our company and what we cherished has not just a valuable company but an important company to the communities we served in.
Larry Moore, Owner, A Company Portable Restrooms
The process was much more involved than I expected and your help, experience and advice was a big factor in making the negotiations go as smoothly as possible.
Terry D. Wickman, President, Keytroller
Dear Chris and Andre, I just wanted to say thanks for all your help. Even though this process was not an easy one, it was comforting to know that I had a capable team standing beside me. You made me feel like we were almost your only client or at least the most important one. Thanks again, and I will recommend your service in the future.
Shenille Engelhart, Owner – CLS Technology
We are extremely pleased with the way Generational Equity handled the sale of our company. Your associates, Tom and Chris, did an outstanding job of getting us (me) through the process.
Michael J Polarek, President, Paragon Packaging
I need to say an immense thank you to Don Ho for his stellar work ethic, attention to detail, and tireless effort. Also thank you to the whole crew at GE! Without you, Don could not do such a phenomenal job. We were shooting for closing and funding before the end of 2020, due to the uncertainty of the political landscape and taxes. I am happy to report we closed last week and will be funding tomorrow.
Dr. Caty J. Catron PhD, RN, VA-BC – Owner, Vic The Picc, LLC
We will highly recommend Generational Equity and Musa Jagne to any business owner about to embark on the same process.
Karen S. Williams, CFO, BW Manufacturing
I would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.
Bil MacLeslie, CEO, ipHouse
Thanks again Phil and feel free to have a future client call me if they would like a referral. You are a true professional!
Andy Graham, Vice President, Modern Heating & Plumbing
I must say that I have never worked with a more driven, competent and focused individual as Don Ho.
Jay Dinnison, Owner of Sharpe Mixers
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).
Bil MacLeslie, CEO, ipHouse
I quickly recognized that Don was working for Sharpe Mixers above all else, and held our interests above others.
Jay Dinnison, Owner of Sharpe Mixers
Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.
Ralph Noblin, President of Noblin & Associates
We knew it would be a difficult task to have someone really understand our business and our market, prior to researching a possible buyer, so it was imperative that we found someone of your caliber, with definite proven experience in this area.
Rick Nowak, President/CEO, Kurz Electric Solutions, Inc.
T.D., thank you so much! You are a great leader! I love how you are using your gifts and talents to better others. You are clearly a GREAT COACH! This 3 day session undoubtedly changed the future of our business, and very well may have been the sole catalyst to save my company, my health and my marriage! A genuine “thank you” from the bottom of my heart.
Bryan D. Horn, Owner, Over Under Clothing
Greetings Mike. Thank you for the captivating and compelling presentation you made at the Phoenix presentation last week. Over many years in business yours was the most informative and well-presented presentation, on any subject, that I have ever attended! Your energy and enthusiasm combined with your concise and captivating support of your positions with easily understood examples and data was compelling.
Pete L.