Earn-outs often get criticized here at Built to Sell, but they’re not invariably bad. In some cases, they can prove to be lucrative.
Consider the example of Jordan van Schyndel’s sale of his Toronto-based custom software development company, DevBBQ. As he shared on Built to Sell Radio this week, Jordan was approached by Quebec-based Spiria seeking a Toronto office. He negotiated a deal paying nearly seven times EBITDA up front, with a performance-based additional payment.
Under Spiria’s stewardship, Jordan’s branch flourished, allowing him to ultimately secure close to 12 times EBITDA for his service business when combining the upfront payment with the earn-out.
Structuring Your Earn-Out
Crafting an earn-out is complex. Acquirers typically link future payments to the earnings of your division within their company. However, after relinquishing control, you might lose direct oversight over financial reporting.
Many acquirers centralize finances, potentially introducing unexpected corporate overhead charges to your P&L. You also might find yourself having to beg for the budget and approvals necessary to achieve your earn-out objectives.
If possible, linking your earn-out to revenue gives you more control, though acquirers might resist this arrangement. Sometimes a compromise involves tying the earn-out to revenue within an agreed budget. In rare cases, you may be able to tie your earn-out payment to the launch of a critical new product or feature, as Rob Walling did when he sold Drip.
A good lawyer will try to protect you in an earn-out agreement, but unless you want to get into a protracted legal battle with your deep-pocketed employer, earn-outs often come down to trust. Above all else, make sure you trust the person proposing an earn-out.
Quote of the Week:
“What led me to sell was a great mutual respect. To this day, we continue a very strong friendship and also the alignment of each other’s company goals.”
– Jordan van Schyndel describing his relationship with Spiria President & Co-Founder Stéphane Rouleau
Clip of the Week
In this clip, Jason Swank shares how to structure your earn-out. Jason sold his marketing agency in 2011 and has transitioned to the role of an acquirer, purchasing nine agencies since then.
Deals
CWT, a company specializing in managing corporate travel and meetings, agreed to be acquired by American Express Global Business Travel. The deal, valued at $570 million in cash and stock, is based on CWT’s projected 2024 financial performance, including approximately $850 million in revenue and an adjusted EBITDA of around $70 million.
