An earn out is a way to bridge the gap between what you want for your business and what a buyer is willing to pay. In an earn out, a portion of the sale price of your business is set aside for payment in the future if you reach certain goals the acquirer sets for your business. You’ll need to stay on for a few years as an employee of the acquiring company to lead your team to hit the earn out goals.
Most owners would prefer all of their cash the day they sell their business and most buyers would prefer to pay the entire amount contingent on future performance. Deals get done in the middle where some portion of your money is paid up front with another slice available if you meet your goals as a division of the acquiring company.
Traditional earn outs are typically tied to the profitability of your company as a division of your new owner and they are fraught with problems. Buyers may thwart you ability to hit your number in any number of ways. In this episode of Built to Sell Radio, you’ll hear from Mac Lackey, a veteran entrepreneur who took an alternative approach to structuring his earn out which put up to 80% of the sale of his company, Kyck.com, at risk.
You’ll learn the surprising approach Lackey took to structuring his earn out to maximize his shot at hitting his number.
Peach New Media was launched in 2001 by Dave Will, who carried the title “Chief Peach” until he sold the business in 2015. Will had built his learning-management software company up to 40 employees when he received an offer from the private equity group Accel-KKR that he simply could not refuse. In this interview, Will shares his wisdom on:
- How to create a company acquirers will want to buy.
- How to figure out when to sell.
- How to look at your business as an investor would.
- Cup-holder ideas and how they impact your company’s value.
Jim Beach sold American Computer Experience for $200 million, which sounds like a fantastic exit, but when I asked Beach if he had any regrets I was surprised by how long a list of lessons he had to share including:
How creating new divisions can help grow revenue but reduce the overall value of your company.
- The dangers of raising venture capital.
- Why growing faster than your cash flow may end up costing you more equity in your business than you want to give up.
- The perils of partnering with a celebrity entrepreneur.
- Why you should never take an angel investment from a friend or family member.
- How to avoid a $250,000 legal bill when selling your company.
In 1999, Andrew Weinreich sold Six Degrees, a social networking site based on the same idea that sparked the likes of LinkedIn and Facebook, for $125 million. In the following years, he went on to sell three other companies including one to IBM and another to Match.com.
Most founders are lucky to have one successful exit, but Weinreich has already had four. In this interview, you’ll learn:
Intellectually, you know you need recurring revenue, but how do you build an annuity stream in an industry where subscription billing is not the standard?
Take a look at the example of Laura Steward, the founder of Guardian Angel Computer Services. She was in the business of fixing her clients’ computer problems when a valuation specialist told her that Guardian Angel was worth less than 50% of one year’s revenue. Determined to get more for her business, she underwent a makeover focusing on her Angel Watch subscription program.
Steward went on to sell her business two years later for four times what the valuation consultant thought it was worth. In this interview you’ll learn how to:
Rod Drury is the founder and CEO of Xero, a cloud-based accounting platform that competes head on with Intuit’s QuickBooks.
Started in 2006, Xero now boasts 700,000 subscribers and a market capitalization of almost $3 billion. Xero was picked by Forbes as the World’s Most Innovative Growth Company in 2014 and 2015.
Drury got the capital to start Xero from selling another software company, AfterMail, for $15 million plus another $30 million in a potential earn-out—not bad for a company with a little more than $2 million in revenue.
Drury offers all kinds of insight in this interview including:
Have you ever stayed in a fancy hotel and wondered how much they pay Aveda for those little bottles of shampoo? Turns out, there is a company called Pacific Direct that acts as a middleman between the hotel chain and the company supplying the shampoo.
U.K.-based Pacific Direct was earning £3.3 million when founder Lara Morgan decided to sell. She got multiple offers for her company and ultimately sold it to a private equity group for £20 million. During our interview, Morgan shared her wisdom on how to sell your company, including:
A direct competitor can often be the most likely buyer for your business. A competitor already knows your industry and may see your company as a way to consolidate market share and gain more pricing control. They may also be able to buy your business and eliminate redundancies in your back office, meaning your business is worth more in their hands than in those of many other potential buyers.
The challenge with negotiating the sale of your business to a competitor is, if the deal falls through, you can end up regretting all the secrets you shared with them in the process.
John Bodrozic is the co-founder of Meridian Systems, which offered project management software to the construction industry. In 2005, Bodrozic began negotiations with a direct competitor and ended up living to regret it.
Part of building to sell is knowing who you are going to sell to.
If you don’t start thinking about your potential buyers list early, you may end up growing an entire appendage of your business that an acquirer will neither want nor value.
Take Northern Lights as an example: Michael Glauser started Northern Lights to offer low-fat frozen yogurt through a growing wholesale distribution network of stores selling his desserts. At the same time, he built up a network of 60 company-owned stores under the Golden Spoon brand. The company-owned stores were expensive to start and complicated to manage.
Glauser went on to sell Northern Lights to Cool Brands International for five times net income. Cool Brands turned around and immediately sold or shut down the 60 company-owned stores because they wanted Northern Lights’ wholesale distribution channel – not a bunch of expensive retail stores.
During our interview, I couldn’t help but wonder how much more Glauser and his shareholders would have gotten for their company had Glauser figured out what a buyer would value and then invested all of his limited resources into building his brand and its wholesale distribution channel from the start.
If you run a service, my guess is you’ve dreamt of owning a product business instead.
Service businesses are such a mess – demanding clients, scope creep, and more often than not, slow growth.
Which leads many service company founders yearning for a product. They tinker with a product on the side, often sucking cash and other resources out of the service business to fund the development of a product, which can compromise the health of the service business.
But there is an alternative: why not sell the service side of your business to have the cash and the freedom to properly invest in your product idea?
That’s exactly what Talia Mashiach, the founder of Eved, did.
Have you thought about when you want to sell your company?
A lot of owners think selling equates to retirement, but selling your business and retiring are not the same thing.
Sure, some people sell because they want to play more golf but many others sell because they want to go do something else.
Take Josh Latimer as an example, he started Birds Beware, a Michigan-based window cleaning business. He built his company up to $800,000 in sales and decided to sell it so he could move his family of three young kids (with a fourth on the way) to Costa Rica.
When Mark Carlson put Minnesota Mailing Solutions on the block, he got two offers for around $3 million, which represented about four times his pre tax profit – a respectable price for a postage meter reseller turning over $4.5 million in revenue.
But Carlson wasn’t satisfied, and in this week’s episode you’ll hear the one simple tactic he used to get the acquirer to boost their offer by 50%.
When the time comes, do you want to sell your business externally, or internally to your employees or family members?
Once you decide, a little piece of you may always wonder how the other option would have played out. That’s why the story of Barry Wood is such an interesting case study. Wood is a door guy, who started M&I Door Systems in 1995, sold M&I in 1998, and then started another – virtually identical – door business in 2003, only to sell it in 2013.
Wood sold his first door business externally and his second internally, so his two exits allow us to see clearly the differences between these two types of sale with an as close to apples-to-apples comparison as possible. The pros and cons of selling externally rather than internally may surprise you.
Mike McCarron sold MSM Transportation to the Wheels Group for $18.6 million. After receiving the letter of intent (LOI) he signed it immediately. If McCarron had the opportunity to do it all again he’d handle this request differently. Listen now and find out why.
For most of its 17 years, Imaging Path was a successful IT services contractor that peaked at more than $16 million in sales.
Imaging Path founder and CEO Corey Tansom kept a close eye on his business until, a few years prior to its sale, Tansom went through a divorce that caused him to spend a lot of time away from the office. Tansom was distracted, costs ballooned and margins shrank. Imaging Path started losing about $500,000 a year.
The situation at Imaging Path got worse when Tansom’s bank decided to pull its financing. Tansom decided his best option was to sell his business – but who would buy a money-losing company?
Carl Silbersky sold his facial recognition software company Polar Rose to Apple in 2010 for a reported $29 million. The negotiation was relatively smooth but Steve Jobs would not budge on one deal point. Learn how one of the savviest deal-makers of our time approached his strategic acquisition.
Katherine Hague, co-founded ShopLocket in 2011 and sold her business two years later to PCH, a billion dollar Irish company.
Hague was a prodigious fundraiser in her two years from idea to exit. She sold 2% of her company to a friend before she had a product, another 10% to an incubator before selling an even bigger chunk in a million dollar funding round.
In our interview, Hague describes some of the landmines to avoid when raising outside capital and why she still has one regret about the sale of ShopLocket to PCH: listen now.
Dennis Hart sold his advertising agency, Apex Media, for 7.1 times EBITDA.
Selling for 7X sounds like a great exit but it disguises the complexity of the negotiations. Hart felt like he knew precisely how much EBITDA he generated until the buyer started questioning his math, adding back extra expenses, and driving down his EBITDA.
Hart walked away from the negotiating table twice. Eventually both parties were able to agree on a set of “add backs,” but this is a good reminder that, when it comes to selling your business, your EBITDA can be subjective.
How much would someone have to pay you to buy your business today? That’s the question Kris Jones was asked when billionaire Michael Rubin approached him about selling. Jones’ answer to Rubin’s question may surprise you.
Back in 2011, Nathan Latka started Heyo, a social media company that helped businesses advertise on Facebook. By 2016, Heyo had raised $2.5 million in seed and venture capital financing and, by all accounts, it was a growing and successful business.
Then Latka sent an unusual email that would ultimately garner him seven offers to buy his business – with the winning bid amounting to an incredible 11 times revenue. Listen to Latka describe the content of the email.
When John Bowen received a $37 million offer to buy his business, he thought it was too good to be true.
As it turns out, it was.
Bowen had received a non-binding letter of intent from a global bank, who made their bid with no actual intent to buy his business. Bowen came to believe their offer was a decoy designed to disguise their real objective: to understand Bowen’s strategy so they could compete better with him. Bowen got wise to their strategy and ended up selling his business to another buyer, Assante Wealth Management, for $25 million.
Bowen reveals his three strategies for evaluating the authenticity of an offer to buy your business during our interview.
John Maddox co-founded the digital agency Ten Fast Feet in the depths of the financial crisis. Despite his timing, Maddox was able to grow the business to $2.3 million in sales by 2013, when he got a call that would change his life forever.
If you have ever put a label on a sippy cup, chances are Julie Cole’s company, Mabels Labels, produced it. Cole and her three partners built Mabel’s Labels into a $10 million business providing labels for kids’ clothing and accessories before being acquired in early 2016 by C.C.L. Industries, the parent company of Avery Labels.
Cole and her partners were able to add hundreds of thousands of dollars to the price they got for their business using a negotiation technique called “normalization” – listen to find out how.
Natalie Susi started Bare Organic Mixers to supply low-cal cocktail mixers to bars and restaurants in southern California. Susi got her product into 300 locations before she decided to sell her company to a strategic acquirer in the organic foods industry. In order to maximize her take from the sale, Susi had to decide whether she was offering an acquirer the chance to buy her company or her product.
Aaron Houghton sold iContact in 2012 for $180 million. The first round of growth was financed by something called convertible debt, which Houghton recommends to any entrepreneur for its simplicity. To hear how Houghton parlayed an initial investment of $250,000 into a $180 million exit.