An earn-out is traditionally tied to the profitability of you company and they are fraught with problems. In this episode, you’ll hear from Mac Lackey, a veteran entrepreneur who took an alternative approach to structuring the earn-out.
In an earn-out, a portion of your business’ sale price is set aside for payment in the future if you reach certain goals set by the acquirer; you’ll need to stay on for a few years as an employee of the acquiring company and 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 somewhere 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 the new owner and they are fraught with problems. Buyers may thwart your ability to hit your targets 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 the earn-out that 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 in order to maximize his shot at hitting his target.
How to minimize your earn-out
Generally speaking, the higher your Value Builder Score, the lower the proportion of your deal that will likely be at risk in an earn-out. To get your score, take 13 minutes and complete the Value Builder questionnaire.
Click to Tweet: Learn How To Structure Your #EarnOut in this week’s episode of #BuiltToSell Radio with @maclackey.
At Built to Sell we’re all about shifting the balance of power from the buyer to the seller. If you support our mission, please write a review on iTunes—and if you have any comments or questions you can find us on Twitter and Facebook. Tune in every Wednesday for another episode of #BuiltToSell Radio with John Warrillow.
About Mac Lackey
An entrepreneur for over 20 years, Mac Lackey has built and sold five companies and raised over $75 million in capital. He and his startups have been featured on CNN, The Wall Street Journal, Fast Company, USA Today and The New York Times.
Some Highlights of the Show
- “The idea was simply to bring technology and innovation to [the soccer] space.” [5:00]
- The revenue stream. [6:45]
- The triggering event. [7:36]
- “I’ve always had an eye towards what is the exit going to be, who are the likely acquirers, and what do those people value.” [7:45]
- “The capital structure.” [9:14]
- “The structure of the deal terms on the first round.” [10:08]
- “I believe there is a category of investor that is highly strategic, if you looked at our initial investors, we basically found an expert in every category that we felt might be or was certainly important in our growth strategy.” [11:02]
- The foundation—“the team, the idea and the relationships were key.” [14:00]
- Preferred vs. common shares. [15:01]
- “I’ve always had this point of view that people who might be considered competitors ultimately could be partners or we could be collaborating.” [16:55]
- “I started that process well before we were in the exit conversation.” [17:45]
- The due diligence period and the shift in power from the seller to the buyer. [ 23:02]
- The letter of intent. [26:12]
- Most surprising—their ability to move quickly through the diligence process. [29:25]
- The unique earn-out structure explained. [35:10]
- Click to Tweet: How To Minimize Your #EarnOut.
- Negotiating with a competitor [40:43]
- Find Mac online at MacLackey.com
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