Using Earnouts in Small Company Acquisitions
August 12, 2011 - 1 min read
Barbara Taylor, a business broker and NY Times blogger, wrote a good post yesterday that describes how a well structured earnout can be a good thing – for both the buyer and the seller.
What is an earnout? An earnout is a form of contingent purchase price that gets paid to a seller over time based on achieving certain agreed upon milestones. Earnouts can be tied to revenue, customer retention, gross profit, EBITDA or any other metric that is agreeable to both a buyer and seller. Earnouts help protect a buyer from "over paying" for a business because, in the event that a milestone is missed, the additional consideration is not paid. On the other hand, earnouts also protect a seller from selling "too cheaply" because, if the company continues to perform well and the milestones are achieved, the seller gets paid additional purchase price over time.
If a buyer and seller want to do a deal, but the proposed transaction value is too far apart, an earnout helps close the gap. We use earnouts in about half of our acquisitions and the typical earnout consideration represents about 20% of the total transaction value – which is frequently the gap between our value and the seller's value.
Scott founded Hadley Capital in 1998 with the idea of bringing a professional approach to the small company market and a passion for working with small company owners. It’s in his blood…he grew up visiting small companies on family vacations with his dad who was also a small company investor.
Scott works with Gillinder Glass, Filter Holdings, Custom Label, GT Schmidt, New Age Cryo, Harris Seeds, ISS, and W.C. Rouse. He was previously the chairman of the board of Packaging Specialists, JRI Industries and Kelatron, all former Hadley companies. Scott currently chairs the Hadley Institute for the Blind Board of Trustees (no affiliation).
He enjoys traveling with his family, flying (instrument rated pilot), rock climbing, golf, paddle tennis, water skiing and unwinds with beekeeping. He holds a BA from Duke University and received his MBA from the Kellogg School of Management at Northwestern University. Scott and his wife Erin have two grown children.