Hopefully you enjoyed part two of our series on structuring earn-out agreements, which discussed the importance of knowing how to value a company and having a clear idea of your company’s growth potential. Without this information, it is highly unlikely that you will set realistic targets that your business must fulfil to receive the optimal return. While our first two parts of this series have concentrated on the financials and figures that will form the base of any earn-out agreement, it is time to turn to another essential aspect of a successful deal structure – what role you will play in your company going forward.
Our dealmakers at Generational Equity have assisted in the structuring and implementation of many earn-outs over the years, and it is common for the previous owners to be contractually obligated to stay with their business in a new role. There are several reasons for this that can benefit both business buyers and owners interested in exiting:
So, having the former business owner on board during an earn-out agreement, either as an employee or consultant, means they can influence the conditions required to receive the optimal return on investment.
Are you prepared to earn your earn-out?
As the business owner, your priorities and ambitions post-exit play a vital role in the structure of your earn-out agreement. If you have no intention of staying involved in your business following its acquisition, whether because you wish to pursue other ventures, devote more time to your hobbies or spend quality time with your family, then we would strongly advise you to not pursue an earn-out deal.
The primary reason for this is that you would not be involved in fulfilling the terms of your agreement, which is a considerable risk. As we mentioned in part one, there is potential for financials to be manipulated by those involved to avoid paying the maximum price for your company. Your best chance of guaranteeing this doesn’t happen is to remain part of the business for the duration of your agreement, and only exit entirely when all conditions have been met.
This will involve a lot of effort and commitment – maybe just as much as you were putting in when you owned the company. So, before entering an earn-out agreement, ask yourself: are you ready to work just as hard as you did as owner to ensure the terms of your deal are met? If you’re not, then this type of deal structure probably isn’t for you.
If you are prepared to stay involved in your business in some capacity as part of your earn-out, it is critical that your new role is not ambiguous. We strongly encourage you to work alongside a skilled M&A advisor during negotiations to clarify what your role will be, what it will entail and how it will influence the execution of your deal structure. It is pointless to set milestones to achieve the optimal return on investment and then not have any responsibility over the duties required to reach these goals.
For instance, if your earn-out is based on net income improvement of 10% over the next three years, you should be given a role that helps make this happen. Our team at Generational Equity have encountered numerous business owners who did not use M&A advisor and realized too late that they had no bearing on the fulfilment of their expectations, which meant that they did not receive the maximum return. That is why it is so important to hire an experienced M&A advisor, who can help you navigate the potential pitfalls of earn-out agreements and allow you to reap the benefits of this exit strategy.
If you find yourself unsure about how to form your exit strategy around your business ambitions, you should attend one of our complimentary executive conferences. Not only will this offer an effective insight into the different kinds of deal structure, including earn-out agreements, but also help you to establish your true motivations for exiting your company and how this will influence which approach is best in accomplishing your goals.
Contact our team at Generational Equity today for more information on how we can support your professional ambitions and build your successful exit strategy.
Generational Equity educated and informed us – so that we could be on the upside of a good decision (to sell).Bil MacLeslie, CEO, ipHouse
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.
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 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
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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.
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
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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 thank you Eric and Generational Equity making our dream come true.Larry Moore, Owner, A Company Portable Restrooms
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Your wisdom and experience were invaluable to me during this once-in-a-lifetime transaction.Ralph Noblin, President of Noblin & Associates
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
Generational Equity’s assistance was invaluable in compiling and marketing our business.Bil MacLeslie, CEO, ipHouse
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
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
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
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.
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 would like to thank you and your firm, Generational Equity, for being our valued advisors in our journey.Bil MacLeslie, CEO, ipHouse
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
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