What's So Wrong With Earn Outs?

If you're a founder who's been offered an "earn out", this is for you. When your company's growth and the buyer's structure aligns, an earn out can work well for both of you, but make sure you understand that an earn out might make some of your sale price contingent on events beyond your control.

If you're a founder who's been offered an "earn out," you might be wondering if it's a good move. An earn out can seem appealing because it keeps you involved in the company and offers potential for extra earnings based on future performance. However, there are some important things to think about before saying yes to an earn out.

First off, let's clarify what an earn out is. It's a deal where part of the money you get from selling your company depends on how well it does in the future. Basically, the buyer pays you a chunk upfront, then more later if the company hits certain goals.

On the surface, this might seem like a good deal for everyone involved. The buyer gets your expertise, and you get a chance to make extra cash beyond the initial sale. But there are downsides to consider:

Control: Earn outs often mean giving up control of the company to the new owners. If things like the economy or industry changes in a big way, it could be tough to meet the goals needed to get those extra payments. You might feel frustrated that your efforts aren't being valued, especially if you don't have a say in important decisions anymore.

Complexity: Earn outs can be tricky to figure out. The terms of the deal might be open to interpretation, leading to disagreements between you and the buyer. Sorting out these disputes can be expensive and take up a lot of time.

Even with these downsides, earn outs can still be a good choice sometimes. If the company's growth plans line up with what the buyer wants, an earn out can help build a stronger relationship between you and them. But it's really important to carefully think about the terms of the deal before agreeing to it. Talk to your deal team, especially your investment bank or advisor, to make sure it matches up with why you wanted to sell in the first place. By weighing the risks and rewards, you can make the right decision for you and your company.

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