I’m referring to offers where the earn-out price was 10% or more of the sale price offered by the buyers not proposing an earn-out. (In other words, sellers accepted less than the potential earn-out price.)
There are lots of reasons why earn-outs are and are not accepted by sellers of profitable businesses. And there are numerous reasons why buyers propose earn-outs.
But, you might wonder why buyers propose earn-outs knowing the odds of seller acceptance are extremely low.
Risk tolerance. It varies among buyers, sellers and the people advising or representing them.
One of the most enjoyable questions I ask people wanting to buy a business: How much can you afford to lose?
(I learned that question from a successful business broker who has a wonderful career not wasting his time/money on business owners and potential buyers who can’t realistically answer that question.)
Perhaps people commenting on my posts will share their experiences: Relative acceptance rates, especially related to the performance of the company/seller accepting the earn-out offers. Pros and cons of earn-outs? Alternatives to earn-outs?
I’m sharing my perspective on the basis of decades working on the purchase and sale of small and midsize businesses. Of course, my experience is skewed because I don’t work for buyers looking to buy a business using a little and none of their money; or for buyers who want to buy anything less than a mature, profitable business showing sustainable competitive advantages.
Tips: The most important thing searchers can do to position the other side of the dealmaking table to accept an earn-out is to create, from the get-go, a trusting and friendly relationship with the business owner and anyone else interacting with the potential buyer during due diligence and dealmaking.
Don’t prematurely bring up the topic of earn-out.
Structure it so it is fairly crafted and well-written with easily understood language for business owners/sellers, without their aid of professional advisors. Yes, sellers will involve their advisors. But the buyer’s position is stronger if the proposed agreement does not require legal, accounting, reporting or enforcement, interpretations – to demystify the proposal. (Ambiguous and unfair proposals are why so many earn-outs are not accepted.)
We can Zoom if you want to talk about it.