Earnouts 101

1 Views
Published
Andy and Jessica welcome you to another episode of The Deal Board Podcast. Today, they are accompanied by the experts to talk about earnouts, answering questions such as: What is an earnout? Why are earnouts good for the buyer and the seller? How do earnouts get paid? How do you structure them? as well as nine reasons to consider an earnout. Deborah Carman and Leanne Erwin share their knowledge on this important matter, explaining in detail how earnouts work, what risks are involved, and how to mitigate them.

Listing of the week: Patrick Bombardiere (Colorado) is selling one of the largest industrial and commercial tire and service businesses that has been in business for 21 years. The business and the real estate are for sale; it has 18 employees. Owners are ready to retire. EBITDA: $550,000. Sale Price of the business: $3.7 million. Price of the real estate: $2.2 million. Contact Patrick (303) 929-9219 or email him at [email protected]

Key takeaways:
[2:41] What is an earnout?
[3:21] How can you make sure the earnout is paid appropriately?
[4:02] Why would a seller want to do an earnout?
[5:00] Reason to do an earnout #1: Differences in the opinion of the value of the business.
[6:10] Reason to do an earnout #2: Ensure that you get paid for the latest capital investments you made as a seller on the business.
[7:10] Reason to do an earnout #3: New customer regulatory approval.
[8:21] Reason to do an earnout #4: The seller wants a piece of the future growth or the buyer is able to provide it.
[8:50] Reason to do an earnout #5: Pending Government legislation.
[10:15] Reason to do an earnout #6: Customer or supplier concentration.
[10:54] Reason to do an earnout #7: Defer taxes (this one benefits the seller).
[11:43] Reason to do an earnout #8: When the buyer just doesn’t have the money.
[12:15] Reason to do an earnout #9: Keep the seller engaged in the transition process.
[14:43] Andy and Jessica talk about the trends in the marketplace.
[17:30] Deborah Carman (Carman Law) dives deep into the topic of earnouts.
[18:29] Why do buyers want earnouts? To avoid risk!
[19:42] How can an earnout be structured?
[20:33] Deborah talks about how to protect the sellers while calculating earnouts.
[21:25] Have there been more earnouts as a result of the COVID-19 crisis?
[21:53] How is an earnout set up legally?
[23:01] Deborah shares an example.
[25:30] Deborah talks about how to protect the interests of the seller.
[26:15] What control does the seller have over the organization, post-closing?
[28:11] Deborah shares about the success of seller earnouts.
[29:30] Deborah provides another example.
[33:56] Deborah gives advice for anyone considering an earnout.
[35:33] Deal of the week: Rupesh Bharad (Richmond) just closed a deal on a roofing company located in Northern Virginia, sold at full price: $2.5 million plus $1 million for the real estate.
[37:55] Leanne Erwin, Vice President of Transworld M&A Division, located in Florida.
[38:20] Leanne defines earnout.
[39:13] Leanne shares the difference between earnouts and seller financing.
[41:21] Leanne shares why earnouts are such a useful tool to bring to a transaction for the benefit of both the buyer and the seller.
[44:25] It is crucial to lay the proper structure for an earnout in order for it to be successful.
[45:30] Leanne addresses the risks on the seller’s side.
[48:34] Leanne talks about the highest levels of risk and how to mitigate them.
[55:38] Leanne shares about the increase in earnouts in the last 18 months.
[57:03] Listing of the week: Patrick Bombardier (Colorado) is selling one of the largest industrial and commercial tire and service businesses that has been in business for 21 years. The business and the real estate are for sale; it has 18 employees. Owners are ready to retire. EBITDA: $550,000. Sale Price of the business: $3.7 million. Price of the real estate: $2.2 million.

Mentioned in this Episode:
The Deal Board Podcast
Subscribe to The Deal Board Podcast YouTube Channel
United Franchise Group
Transworld Business Advisors
Transworld on Linkedin
Transworld on Facebook
Call us — (888) 711-9018
Email us [email protected]

Call Deborah Carman at (561) 392-7031
Email Rupesh Bharad at [email protected] or call (804) 390-8710
Email Leanne Erwin at [email protected]
Contact Patrick Bombardiere (303) 929-9219 or email him at [email protected]
Category
Job
Be the first to comment