MJ DeMarco
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Thought this should be its own thread.
If you ever have a chance to sell your company and an "earn out" is part of the deal, TRY TO AVOID IT.
Negotiate something else in the deal -- cash, stock options, stocks, more equity, SOMETHING.
Over the years, I continue to hear horrible stories about earn-outs that fail, not because of the acquirees performance, but because of the acquirer.
The first sale I did had a fairly substantial earn out, which I earned none of because the acquisition company PIVOTED.
I think one of @Vigilante's business sales had an earn-out, and he reported a poor outcome as well.
If you're not familiar with what "earn outs" are, here is a ChatGPT definition:
--- AI START
An "earn out" is a contractual provision that is often included in mergers and acquisitions. It stipulates that the seller of a business must "earn" part of the purchase price based on the performance of the business following the acquisition.
In other words, an earn out is a way to bridge a valuation gap between a buyer and a seller. If the seller has optimistic expectations of the business's future performance, they may feel that the business is worth more than the buyer is willing to pay upfront. In this situation, an earn out can be used to pay additional money to the seller if the business achieves certain financial goals in the years following the acquisition.
The terms and conditions, including the period of time the earn out covers and the performance metrics, can vary widely and are subject to negotiation. Some of the most commonly used metrics include net income, gross revenue, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
While earn outs can facilitate agreements, they also come with risks. For example, if the business doesn't meet the agreed-upon targets, the seller might receive less than the initially expected value. Also, disputes can arise about the management of the business, as the buyer typically takes over operational control while the seller retains a financial interest. It's crucial for both parties to have clear agreements in the contract to mitigate potential disputes.
--- END AI
Do you have an earn-out story to share?
If you ever have a chance to sell your company and an "earn out" is part of the deal, TRY TO AVOID IT.
Negotiate something else in the deal -- cash, stock options, stocks, more equity, SOMETHING.
Over the years, I continue to hear horrible stories about earn-outs that fail, not because of the acquirees performance, but because of the acquirer.
The first sale I did had a fairly substantial earn out, which I earned none of because the acquisition company PIVOTED.
I think one of @Vigilante's business sales had an earn-out, and he reported a poor outcome as well.
If you're not familiar with what "earn outs" are, here is a ChatGPT definition:
--- AI START
An "earn out" is a contractual provision that is often included in mergers and acquisitions. It stipulates that the seller of a business must "earn" part of the purchase price based on the performance of the business following the acquisition.
In other words, an earn out is a way to bridge a valuation gap between a buyer and a seller. If the seller has optimistic expectations of the business's future performance, they may feel that the business is worth more than the buyer is willing to pay upfront. In this situation, an earn out can be used to pay additional money to the seller if the business achieves certain financial goals in the years following the acquisition.
The terms and conditions, including the period of time the earn out covers and the performance metrics, can vary widely and are subject to negotiation. Some of the most commonly used metrics include net income, gross revenue, or EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
While earn outs can facilitate agreements, they also come with risks. For example, if the business doesn't meet the agreed-upon targets, the seller might receive less than the initially expected value. Also, disputes can arise about the management of the business, as the buyer typically takes over operational control while the seller retains a financial interest. It's crucial for both parties to have clear agreements in the contract to mitigate potential disputes.
--- END AI
Do you have an earn-out story to share?
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