5 Reasons Why Investors Want an Earn-Out Agreement

Well, I’m not sure where I came across the article, but owners of reprographics companies might find this article of interest, since printing businesess and reprographics businesses are similar, especially when it comes to selling a business.

Mr. LaManna, the author of the article below, takes a pretty hard line on the “earn-out” issue, kind of implying that “no” business will be sold without an earn-out, which, of course, is simply his own personal opinion. My own personal opinion on this issue is that “always” never applies. Some “buyers” may only be interested in offering earn-out deals to sellers, but there are still likely to be buyers who are willing to offer cash-out deals (cash, notes, stock deals) or a mixed deal where cash, notes, stock and some form of earn-out are elements of the deal.

If, now or in the future, you are a “seller” considering a deal that does or will involve an earn-out as a part of the deal, then beware ….. once you sell your company, the buyer is in control, and I’ve seen deals where the buyer stepped in and made decisions that adversely affected the seller’s ability to achieve the earn-out!!! So, if your deal to sell does include an earn-out, make damn sure that you won’t get screwed because of the buyer’s decision to mess with the business.

Okay, here’s the article I mentioned:

“5 Reasons Why Investors Want an Earn-Out Agreement”

Posted by Rock LaManna on Wed, Feb 08, 2012 @ 08:00 AM

(From Rock Around the Block - The Blog of Rock LaManna)

I’d like to dispel one romantic notion printing owners have about selling their business. I want you to stop thinking that you’re going to cash out when you sell your business. It’s not going to happen. An earn-out agreement is much more likely in today’s world.

If you’re not sure what an earn-out agreement is, it’s basically a payment for performance after a deal is closed. An investor might buy your business at a lower price than you believe it's worth, and then retain your services until you can improve performance to meet your intended sticker value. (For more details, check out my 3-part series “When Does an Earn-Out Agreement Make Sense?”)

Like it or not, this is how business is done these days, and here are 5 reasons why:

1.Investors want a business based on tomorrow’s performance. They don’t want to invest in a company that’s totally reliant on you. That’s why they won’t just let you walk away: You need to create the systems that allow the company to function without you, or at least transition to a new CEO who can take your place.

2.Not many losers making strategic acquisitions. I’m sorry, but unless you’ve got some sort of amazing technology or incredibly well-structured company, no investor will buy you without an earn-out agreement. The only person who would make that kind of deal does not know what they’re doing. You’re not going to find that kind of incompetency in today’s investor.

3.The buyers are shaping the risk. In case you hadn’t notice, the poor economic situation has many printers trying to sell their business. The investors are calling the shots, and when they’re running the show, an earn-out agreement will likely be part of the deal.

4.Investors have learned from recent economic meltdowns. Between the dot.com bubble of 2000 and the housing bust of 2008, investors have (at least for now) become more discerning. They’re buying based on solid business models, not on promises of quick cash. And they’re rewarding owners in the same way.

5.It’s the new paradigm. Like it or not, the earn-out agreement has become part of the mergers and acquisition landscape. If you’ve built a solid business and earned every cent of your profits, it doesn’t matter. You’re going to have to earn it all over again to make an investor happy.

Look, I don’t want to dispel your dreams of selling your business. I just want you to go into this type of arrangement with your eyes wide open. A smart investor will purchase something that’s successful. It’s just that they want to keep that success going – and you’re the one to make that happen.

To read about mistakes to avoid when selling your printing business, download, Rock LaManna’s “12 Code Red Seller Mistakes.”Rock LaManna provides executive coaching for printing owners looking to grow their printing business, merge with a synergistic partner, make a strategic acquisition, or create a succession plan.