How to counter typical seller objections for earnout and seller note?

by a searcher

2 years ago

In almost every deal that I come across I encounter a typical seller objection for earnout or seller note along with lines of - "I will not be in control of the business post sale, so I do not want to have my sale proceeds over something that I'm not in control of in the form of an earnout or a seller note" - or a similar variant. Obviously as a buyer I do not want to give all of the amount as cash at closing and I do want to hold some back. 

My question is - what is the most effective way for a buyer to counter this typical seller objection during initial negotiations?

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12 comments

professional from Pace University

Unless the seller can impact the basis for an earnout, it's not really an earn out-even if it is one in name. If I were the seller, I would push back and/or simply not accept an earn out for that which I cannot have sufficient impact. if you goal is simply not paying all at closing, make it a seller note. If you are concerned about certain issues, consider an escrow related specifically to those issues. If your concern is revenue and profits, try to structure an earn out that the seller can impact.

2 years ago | like reply | 0 likes

intermediary from The University of Chicago - Booth School of Business

1) A typical SF buyer does not have the experience of running a business. Education, nor industry experience, is not a substitute for experience of running a business, managing people, maintaining customer/supplier relationships, servicing debt, etc. Hence, seller is concerned about seller notes and earn-outs.
2) On the other hand no seller has a "perfect" business. Even audited financials can be managed. Seller Note is for risk mitigation. 100% DD is impossible. A seller note is a means to get some assurance that the seller is not passing a lemon###-###-#### % is common for risk mitigation. Seller note can also be justified for price preservation when financing get tight.
3) Earn-out is warranted if there is a business risk that is beyond the control of the owner (the seller or the buyer). Seller will not accept earn-out for a stable business. Contrary to common thinking, earn-out is not a means of bridging a value gap unless the the business is expected to have a high growth, in which case, earn-out can bridge the value gap driven by difference in expected growth. So, for a stable business seller would resist earn-out.
4) Alternatives to Seller Note are larger escrow, tighter R&W, etc.
5) Post-transaction covenants (there are many) can also be used to calm Seller fear on Seller Note. That usually does not work with earn-outs.

2 years ago | like reply | 1 like

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