Page 15 - NBIZ Magazine December 2020

0 If a seller has an earn-out tied
to financial metrics somewhere
below the top line, the seller and
the buyer must agree on key AN EARN-OUT IS A PROVISION DEFINING HOW
definitions and how those metrics
will be calculated. It’s not enough A SELLING OWNER MAY RECEIVE ADDITIONAL
to tie an earn-out to “net profits”
without defining what goes into PAYMENTS AFTER CLOSING,
net profits and what does not. The CONTINGENT UPON SPECIFIC
issue is more complicated than
just agreeing on the meaning of RESULTS SUCH AS
certain words and phrases. After
purchasing the seller’s company, STIPULATED FINANCIAL
the buyer may allocate some of
its overhead and liabilities onto PERFORMANCE
the company’s financial results.
This could be a nasty surprise if OR MILESTONES.
the seller and the buyer did not
precisely define net profits during
the sale negotiation.

0 Regardless of which metrics
the earn-out is tied to, as the
selling owner, one is still at will the earn-out last? Is there a risk to the point that the buyers do
risk if the buyer mismanages cap on the potential payments? Can not see any need for an earn-out.
(unintentionally or intentionally) the missed earn-out installments The second step to avoid getting
the company’s operations after be recovered if the company later burned by an earn-out is to hire and
the sale, undermining or outright catches up? Can the buyer offset work with an experienced exit advi-
killing any chance of hitting the indemnification claims against sory team. One’s accountant, lawyer,
earn-out targets. For example, earn-out payments? These are only investment banker, and exit planner
assume the seller has an earn-out some of the critical issues that must must have extensive experience with
tied to top-line results. Using top- be addressed and negotiated. similar situations and be qualified to
line revenue seems simple and give sound advice. One’s investment
clear. But the new owner can take Maximizing Cash at Sale banker and lawyer, in particular,
any number of actions that make it Owners seeking to one day sell will be one’s A-team in negotiating
hard or impossible to achieve the the company at exit must build a the deal terms, especially any earn-
top line milestones: What if newly company that is so attractive to out, and in protecting the seller’s
hired leaders are not competent? potential buyers that they will offer interest. Do not use general purpose
What if the new owner raises all-cash terms. Earn-outs at their core advisors when selling one’s company.
prices, ultimately decreasing sales are a mechanism for buyers to limit With this, one carries the risk that
or even losing customers? What if risk: risk that the company will not any fees that one might save will
the new owner raids the company perform as desired after the sale; risk be paid back multiple times over in
and redeploys some of the best that existing customers will leave future costs and losses.N
salespeople to another department? or decrease their volume; risk that
What if the new owner changes top employees will flee, etc. Building At NAVIX, our clients are prepared
the company name and, in doing a business that sells for all-cash to potentially sell their business for
so, disrupts marketing and lead terms involves more than just grow- all-cash deals and have advisory teams
generation? The selling owner ing revenues and profits. To avoid qualified to help avoid the fallout
bears the risk of any decisions earn-outs altogether, a seller must caused by an ill-negotiated earn-out. To
or actions that negatively impact hire and align a quality leadership learn more about how to prepare one’s
company performance to the point team, eliminate one’s involvement in company to sell for 100% cash, contact
that the seller does not hit one’s routine sales and operations, achieve us to schedule a complimentary,
earn-out targets. a strong track record of growth, confidential consultation with one of
reduce customer concentration, and our independent NAVIX Consultants.
0 The seller and the buyer must agree have effective financial systems and Visit www.navixconsultants.com
on additional and important terms processes. Building a business that is or email Patrick at pungashick@
and definitions, such as: How long robust in these areas reduces buyers’ navixconsultants.com.

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