Is an earn-out a good idea for the seller?

An earn-out moves risk back to the seller. Part of the price waits on results under the new owner. A buyer asks for one when it doubts a plan still to be delivered, or a business that leans on one person or customer.

What does an earn-out do to the seller's risk?

The seller has sold the business, but part of the price still rides on its results. After completion the buyer owns the business and makes its decisions. The seller carries the plan's risk without the owner's control.

Where the targets come from a plan that outruns the record, the earn-out pays on numbers the business has never produced. A miss then comes straight off the seller's price.

Why does a buyer ask for one?

A buyer pays in full for what it can test. It holds back payment for what it cannot.

• Dependence on one person, customer or licence. A good business that a buyer cannot separate from its dependencies is one event from losing its value. A buyer then structures the deal around the dependency, with contracts, retention terms and an earn-out, before it agrees a price.
• Growth that starts after the sale. An initiative that begins after completion is the buyer's upside, and the buyer prices it as its own.
• A plan that outruns the record. A buyer's advisers lay the plan against three years of history, then price the business on the plan they believe. An earn-out pays for the rest only if it arrives.

What can a seller fix so a buyer does not need one?

Each fix moves evidence from after the sale to before it. A buyer then pays for it in the price.

• A plan bridged to the record. Driver by driver to the last three years, with the base year tested for one-offs.
• Growth already started. The lead initiatives show measured results in the run-rate for two quarters or more before the sale opens.
• A business that runs without the owner. Decisions and the top customer relationships sit with named people, and a full quarter has run with the owner out of day-to-day decisions.
• Customers on contract. The top accounts are contracted, and concentration falls year on year.
• A forecast record. A written record of budget against actual, with every miss explained.

The seller check describes the owner test passed in one sentence: "The business has run a full quarter with the owner absent from day-to-day decisions and customers, and hit its numbers." Dependence on the owner and on a few customers takes years to fix, so those fixes start first.

The next step

The seller check asks what a buyer's team will ask, and shows which proofs are still missing before you agree to any deferred price. No email before your result. No sales call after it. No list. Delete on request.

Related questions

• What multiple will my business sell for?
• What is vendor due diligence, and do I need it before selling?
• Why is the plan the buyer's first test?

This page is drawn from the seller check's grid and recommendations, the buyer-side deal grids and an article on the sale plan, on onestepright.