Earnouts 101: How They Impact Sell-Side M&A
Even though M&A transactions are the final steps in selling a business, they’re usually very lengthy. As you let go of your legacy, you need expert assistance with these complex processes.
Unfortunately, even with an experienced intermediary on your side, these final proceedings can face a deadlock. Sometimes, a well-planned negotiation strategy will go south, and all that time and effort will go to waste.
A common cause of deadlock is the buyer’s risk which your M&A advisor can mitigate with earnouts. In as much as they’re controversial to M&A, earnouts come in handy when a deal is likely to flop.
Let’s examine when earnouts are appropriate.
What is an Earnout?
Before we begin, you must understand what earnouts are. In simple terms, earnouts bridge the substantial gap between your business valuation and the buyer’s estimated value of the business.
Sellers will always perceive their businesses to be of maximum value, but buyers will not always agree.
When an earnout is tabled, the seller will withhold an agreed-upon percentage of the official sales price until the business meets specific financial merits. Earnouts change the deals of a transaction in order to save a sinking ship.
Why do Earnouts have a Bad Reputation?
On the surface, earnouts seem unfair to seller, and can also have adverse outcomes for the buyer. When it is introduced, the seller has to work overtime to ensure the buyer is satisfied by the business’ performance.
If the business fails to deliver, the seller doesn’t get the withheld percentage of the agreed-upon selling price. Sellers then lose twice because they weren’t compensated for their extra effort to ensure the business fulfils the buyer’s conditions.
Another reason why earnouts have such a bad reputation is because they’re paid in future, often without interest. If the sell-side party had put cash towards driving up the value of the business, it cancels out with the earnouts.
Can Earnouts be Helpful?
Every solution has its upside and downside, but does the good outweigh the bad when it comes to earnouts?
From the buyer’s perspective, this is a win because it’s an excellent bargaining chip to ensure they get the business they signed up for.
Sellers, on the other hand, should steer clear of an earnout; especially if you’re selling an established business with a solid financial history.
So does Earnouts Help Sellers at All?
Well, if you’re letting go of a startup that barely has a financial history, an earnout could work in your favor. Work with an experienced M&A advisor who has the technical knowledge to help you arrive at an accurate business valuation.
Are you looking for the perfect exit from your business? The best strategy is to double down on your negotiation strategies. Focusing on an earnout that’s not even guaranteed is futile for anyone seeking financial freedom.
Earnouts are controversial because even though they seem like the way out in deadlocks, they might cause even more harm in the end. Make sure you work with an experienced M&A advisor for the best negotiation strategies. You need expert assistance to successfully close M&A deals because they’re quite lengthy and complicated.
Let’s hop on a quick call to discuss the timing and prospects of an exit based on your goals and the current state of your business. Schedule your free exit consultation today.
You're guaranteed to come away from the call with:
Clarity about your business
Knowledge of the landscape
A high-level exit plan
A rough valuation
Specific next steps
What our clients say
In my career you get to deal with a lot of service providers. There are the below average, the average the the above average. Then there is one category that no one talks about which is the exception. We engaged Hello Exit to source acquisition targets for us. The communication, personal service, attention to details, availability, interaction with the team has been nothing short of exceptional. If ANYONE wants further in-depth conversation about the exceptional experience please reach out.
I worked with Hello Exit for the sale of a business and everything went smoothly. The team was very hands-on and provided a lot of guidance throughout every part of the process. They took the time to get to know my business well and were able to communicate our operation effectively to potential buyers. The sale was a success and I couldn’t have done it without them.
Hello Exit was great working with me to help sell my software company. They made everything clear, were patient, never over pressured me, but kept a strong sense of urgency. I would recommend Hello Exit to anyone looking to sell their business and plan on working with them again in any capacity that I can.
The team Hello Exit is simply incredible! Their expertise and support throughout the entire process of selling my company were a game changer. Their expertise and guidance throughout the entire process was invaluable. They took the time to truly understand my needs and goals, and helped me navigate every step of the way with ease. Hello Exit is exceptional, and they truly go above and beyond to ensure their clients are not only satisfied, but actually excited about their exit!! I cannot recommend Hello Exit enough! Their professionalism, knowledge, and dedication to their clients are unmatched. If you’re looking for a top-notch company to help you sell your business, look no further than Hello Exit. Thank you guys, for all that you do!
It was a pleasure working with Hello Exit and they have my most sincere recommendation. They bring a sophistication and etiquette that is very hard to find in the lower, lower middle market – outstanding preparation, excellent sell-side coaching, a rationale / unbiased disposition, and so on. In addition, they bring a powerful network to the conversation and can add value well beyond the transaction. I hope to work with Hello Exit on many more deals to come!
Hello Exit added tremendous value for our portfolio of companies. They made a complex sale process easier and significantly more efficient. We received 5 offers (two above ask) and were extremely happy with the outcome. As a serial trouble maker that has acquired 7 companies and sold 4 we will be using Hello Exit for future exits.
Hello Exit has built one of the best online business brokerages out there. As a buyer, the company has continuously provided us with acquisition targets that have been very well qualified. Every opportunity has fit directly into the criteria we’ve been looking for which has saved a ton of time on due diligence. If you want to get a jump start on your acquisition pipeline, it’s easy to recommend Hello Exit.
Hello Exit is one of the most knowledgeable business brokerages out there for tech & web businesses. We used they to buy a significant business operated by 15+ employees. Our work in diligence was substantially reduced given the strong & accurate information package he provided. All questions were proactively answered, all supporting data was there and presented in the right format, and everything was accurately represented. This saved us weeks of work! In discussions & negotiations, they played a fair role & helped resolve issues by understanding the issue from the perspective of both buyer & seller. With their knowledge and experience, they were able to make smart suggestions and helped everyone reach a common ground quickly. I would surely work with Hello Exit again. They are super!
What can I say other than Hello Exit delivered on everything they promised… and then some. At first, I didn’t believe it when they said he would sell my agency in a few months. But they were so passionate about working together, a part of me believed they would deliver. And they did. We had 3 offers in 30 days and went under contract with the highest offer. 3 months later we closed on the sale at the price they evaluated us on. During the entire process, their knowledge and experience helped immensely. Any time there was confusion or a hurdle that myself or the buyer had, the team stepped in and smoothed every over. Selling a business is one of the most invigorating yet stressful experience I’ve ever went through and I’m so grateful that I picked the right broker to help me through it. I’d use Hello Exit again in a heartbeat.
The Hello Exit team was great to work with. They helped increase our deal flow with strategic deals. If someone is looking to increase their targeted deal flow I would definitely recommend working with Hello Exit.
Hello Exit was awesome to work with on the deal. They provided great support and advice all through – from initial interest discussions, negotiations, contract closure to execution. They’re very prompt and proactive which sails the deal making through. They also provided great support and mediation help post transition on some key contract payout clauses, which is highly appreciated. I recommend Hello Exit highly to SaaS business owners and entrepreneurs.
I’ve known Dustin (Hello Exit’s Founder) for over 10 years, and actually acquired a SaaS company he founded. I’ve always found Dustin to be extremely sharp, fair and honest, reasonable to deal with, and the kind of person you would want to do business with again in the future (which is rare these days). I’m currently mentoring and incubating over 150 international startup companies, and have already talked with Dustin about bringing Hello Exit into these businesses to broker the exit once they are profitable and solidly into their momentum phase.
Hello Exit is one of the best and most trustworthy SaaS advisories and brokerages in the industry! If you run a SaaS business, and Hello Exit contacts you, you should definitely talk to them! Even if you decide not to sell, it will be a very worthwhile and fruitful conversation.