Run, don’t offer, if an earn-out is necessary?

Keep in mind the elephant in the room: Buyer competition. (Not forgetting, brokers.) I am commenting on my post thanks to other commenters triggering something that happened to one of my clients who “lost” a deal to buyer competition. We offered an earn-out. The competing buyer did not. Total price was close enough not to matter. The broker said the seller really liked my client, and might have preferred him were it not for the earn-out. Here’s what I, afterwards, said to my client: One of the most things you can do is to know more about whomever “won” your bidding war. For example, if the potential buyer is an ill-informed or ill-advised individual, there’s a good chance that person is taking on more risk at a higher cost than a more-informed buyer would. On the other hand, if the buyer is already in the industry or is diversifying into it, the risk factor is much less. In your case, because the way-more-than safe customer concentration problem and the questionable valuation, there is more risk than what is usually accepted by the most well-informed private parties (who also know how to find more opps). Two things I hope you will seriously consider: Businesses for sale are like buses; more will come by later. And while we’re thinking about lost income opportunity we’re also thinking about unnecessarily accepting more risk than necessary. The better and more active your search, especially if you continue communicating with owners/vendors, the more likely you’ll make the best deal possible. (Searchfunders and searchers: Does it make sense?)

Earn-outs are often part of the initial acquisition conversation but depending on the type of business can be negotiated away if the seller is more interested in a lower, but more certain, acquisition price. Earn-out measurement is often problematic, so if an earn-out is part of the consideration mix, a clear definition of the earn-out (hopefully gross revenue from specifically identified customers with other qualifiers) is essential.