Over the years as I speak with clients and more recently, the business owners I have interviewed on my podcast, it is clear one aspect of selling a business is tougher than most would expect. Specifically, the transition phase whereby the founders complete their ‘earn-out’. When a business is sold, there are usually 3 components made as payment, cash, stock and an earn-out. The cash is the amount of the business you sell for dollars in the bank. The stock is the shares in the new entity you receive, often a much bigger listed company. The earn-out phase is a period after the business is sold, after which the seller receives additional payments in exchange for assisting with the transition of the business to the new ownership. Typically lasting up to three years, the earn-out phase incentivises the seller to work towards agreed-upon objectives and performance targets being met to earn a bonus payment.
The earn-out is an extremely important part of the deal but is sometimes overlooked or at the very least not given the level of consideration by founders as it warrants. After the initial excitement of being acquired for millions, reality soon hits because how the earnout phase is set up and who you have sold the business to is going to impact your life in a big way for the next three years. While many people are willing to endure discomfort for three years when a large cheque is on the table, it is worth taking the time to plan and negotiate the earn-out terms. It is especially important to consider how the next few years may play out if things don’t go well. It could be because of targets being missed, personality clashes or simply tough economic times but you’ve got to consider the downsides.
The comment I hear the most is that you lose two things that are more important to entrepreneurs than anyone else, autonomy, and time. So be aware that you have handed over ‘your baby’ and you are not in control of the decisions anymore. Other people are in charge and they will not run the business the same way you did. Your business will be part of a larger organisation with a hierarchy that slows everything down. No longer can you decide on a marketing campaign in an afternoon based on your gut instincts based on 20 years of business. Now those are group decisions that must go by the head of marketing for approval. But they will need to run it by legal for approval and so on. Be aware that is just how it will work going forward.
The reality is that you’re going to experience significant change in the transition phase. More so than anyone else in the business. The greater the percentage of the business you retain, the more important it will be for you to have a level of control. Most importantly you need to prepare yourself psychologically that the business is no longer yours. The new owners will probably drive you insane at times and make decisions that make no sense to you at all. So, you need to be mentally prepared for this because they may very well take your years of blood, sweat, and tears and mess it all up. It might turn out great too and everyone will live happily ever after, but do not underestimate the earn-out phase and the impact it will have on your life for those few years.
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