The third way to avoid being burned by an earn-out is to ensure that you have access to sufficient resources.

Imagine it’s the day after you inked the sale of your company. Much of your pay-out is based upon meeting revenue targets in the coming quarters, but you’re confident that you’ll meet the revenue targets – managing this business is as easy as turning a crank at this point. You’re on cloud nine. That is, until you check your voicemail. The second message is from the CEO of the buying company, your new boss. He notifies you that your marketing budget has just been cut in half as part of a cost cutting exercise. You know that it is now impossible to meet the revenue growth targets outlined in the earn-out – you’re not going to be able to maximize your pay-out. You just sold your company at a discount.

Scary scenario? You bet. Here’s another.

You are two months into the agreed upon one year employment at the buyer’s company. You have been instrumental in ensuring that your company, now a division of the mother-ship, is hitting its numbers. With close monitoring, you’re confident you’ll get the rest of your payout.

After getting settled into your office for the day you head over to the CEO’s surprise strategy meeting, where he introduces a new product line that he feels you would be perfect to run (since you’re the only person in the company that has built anything in that sector). Aware of your commitment to your division he asks you to split your time – allocating 50% of your attention to the new product line. You leave the meeting trying to find a way to reposition yourself, as you’re worried that your division won’t perform enough to meet the earn-out benchmarks without your full attention.

While it’s impossible to layout all of the details around the resources (staff, capital and your own time) you’ll need when you enter into an earn-out, you should try to obtain agreement from the buyer about your resource availability and you should have your lawyers bake in some language that can protect you.

You should also try to create a formal mechanism for increasing your resources as needed. If market dynamics change, market rates for key resources change or unique opportunities present themselves, you need to be able to take advantage of those changes. Incentives should be aligned; it’s bad for everyone if the company stifles your business’ growth just to minimize your earn-out. Having a pre-defined process for making these adjustments can help along the way. One approach is to have a formal quarterly review of your resource allocation that includes all of the appropriate people.

Comments

[Samantha Arpino]

A great resource is deffinutly the Wall Street Office's. Find a way to connect to professionals on wall street and enhance your company by joining Wall Street Connect's group!!!!