Most founders will tell you that a three-year earn-out feels like a prison sentence. They toil in the bowels of a giant organization where every purchase they make, and every decision they take, is scrutinized by multiple layers of management.
The alternative is to take your medicine up front. Spend three weeks documenting your processes for doing things in your business so that you can make the case to an acquirer that your business can run without you. That in fact, there is no need for an earn-out (grab your copy of The Definitive Guide to Standard Operating Procedures).
How Jodie Cook Avoided an Earn-Out
That’s exactly what Jodie Cook did. Cook is the founder of JC Social Media, which she built to 16 employees. She was determined to see her company flourish without her, so she positioned a staff member as her company’s spokesperson for media interviews. She kept a log of every time an employee asked her a question and set about transferring her tacit knowledge to her team.
Cook also created an operating manual for her business. She identified approximately 50 recurring processes and wrote down her instructions in an operating manual. She explained everything from how to answer the phone to how to run payroll.
As things changed, Cook modified the manual. When employees asked a question, her automatic response was to check the manual.
The business started to thrive without Cook overseeing things day-to-day.
In 2020, Cook decided to sell and thought her business could be worth 5-7 times EBITDA.
Cook’s first offer was for five times EBITDA with approximately 20% of her potential proceeds tied to a three-year earn-out. Cook realized she had failed to make it clear just how well her company ran without her.
Cook continued to market her company to buyers, but this time went out of her to explain how well the business ran without her involvement. She showed acquirers her operating manual and explained the lengths she had gone to make herself redundant. She received two additional offers and accepted one at the top end of the range she was hoping for.
She left two weeks later.
If the idea of an earn-out sounds like a prison sentence, take your medicine up front. Invest three weeks in the painstaking process of documenting your Standard Operating Procedures (SOPs) so that an acquirer will be able to run your company without you, enabling you to ride off into the sunset, cash in hand.