Avoiding earn-out pitfalls in mergers

Some thoughts on agency acquisition 'earn outs' 💰 1. Seems to me like a lot of them are designed not to be achieved. If you're going to sell to someone based on an earn out, check to see whether they're going to saddle the agency with a bunch of additional costs for things like shared services which will be out of your control. One founder I spoke to said they'd need to 3X their EBITDA to hit their earn out target 🤯 If so, you'd better be content with the initial consideration as that might be all you see. 2. Think about how motivated you are likely to be 3 years into an earn out after selling. Having spoken to a bunch of folk who sold their agencies, they usually talk about the earn out period as being painful. In some cases 'a living hell'. Three years is not a short time to spend in 'living hell'. 3. Does an earn-out even make sense if you're not in charge of the direction and decisions in the company? Make sure you have control over the progress towards the targets you're being held to. Otherwise the earn out is like being graded on someone else's exam paper. Only instead of a grade, you lose a ton of cash. 4. Exiting founders can be in a much better place to push back against an earn-out if the agency isn't totally reliant on them for sales/client relationships/management/everything 😅. In many agencies, the founder is doing the work of 3 people for the salary of 0.5 people. Take them out, the business is in trouble. Which is why the acquirer demands a fat earn out, to keep the key person in role and incentivised to keep driving the results. If you fix this, you have more leverage (and you're more valuable). === Obviously there will be many examples of earn outs that are all sunshine and rainbows. But there seems to be a whole bunch of rainy ones as well 😆

Earnouts sound great… Until you realize you’ll never see the money. Buyers structure earnouts to avoid paying them. Sellers structure them to guarantee a payout. Here’s how to ensure you don’t get locked out of your own upside. ⬇️ Earnouts sound good in theory until they don’t pay out. Sellers see them as upside. Buyers see them as protection. Avoid getting shortchanged by: + Locking in clear performance metrics: Revenue, EBITDA, or customer growth? Vague targets give buyers room to manipulate outcomes. + Defining control over key drivers: If the earnout depends on hitting numbers, make sure you have the resources and decision-making power to achieve them. + Capping contingencies: Buyers may tie payouts to undefined “reasonable efforts.” Nail down specifics to avoid disputes. + Structuring payment timing carefully: Spread over multiple years? All or nothing? The schedule matters as much as the amount. + Planning for buyer behavior: Buyers might cut costs, shift priorities, or restructure post-close. Build protections that prevent them from tanking your earnout. An ambiguously drafted earnout is just a way to leave money on the table. Get it right upfront.

You just sold your business for $10M… Or did you? Because $4M of that is tied to earn-outs—performance-based milestones over the next 24 months. The problem? You don’t own the business anymore. You’re no longer in control. And suddenly, hitting those targets doesn’t feel as simple as it did in the spreadsheet. Let’s talk about earn-outs. They’re marketed as upside. But in reality? They’re how buyers de-risk—and how sellers often get short-changed. An earn-out is when a portion of your deal value is contingent on future performance. They’re most common when: ◾ Buyer and seller disagree on valuation ◾ The business is founder-led or early-stage ◾ Growth expectations are high, but unproven ◾ The buyer wants the founder to stick around post-sale Here’s the trap: You agree to an earn-out thinking, “I know this business. I can hit those numbers.” But 3 things happen after the sale: 1️⃣ You lose control. You don’t run the team, budget, or strategy anymore. 2️⃣ Priorities shift. The buyer may pivot, cut funding, or redirect resources. 3️⃣ The math gets fuzzy. Revenue attribution, margin calculation, and customer renewals can all be “reinterpreted.” And suddenly that $4M? It’s vapor. Are earn-outs always bad? No. But they’re rarely free money. They work best when: ✅ Based on milestones you control (e.g., staying 12 months, delivering key integrations) ✅ Tied to simple, binary triggers (e.g., “Launch v2 by X date” not “Increase profit by 18%”) ✅ The buyer has a proven track record of honoring them ✅ They’re a bonus—not the bridge making the purchase price “work” How to protect yourself: 🔹 Cap the timeframe (12–24 months max) 🔹 Define exact metrics + reporting cadence 🔹 Avoid pure revenue or EBITDA triggers—blend metrics 🔹 Require access to performance data + audit rights 🔹 Spell out scenarios (restructuring, business pause, early termination) Bottom line: Earn-outs aren’t inherently bad—they’re just misunderstood. They should never be required to make the deal make sense. If they are, you’re not selling… you’re betting. #MergersAndAcquisitions #EarnOut #ExitPlanning #SellYourBusiness #DealStructure #FounderAdvice #StartupExit #MandA

We sold our 120 employee $14M top line company 2 years ago. There were many lessons, but here are 5, plus a bonus, that I value the most and share with entrepreneurs regularly. 1️⃣ Everyone told me to get clear on the terms in the LOI up front. It’ll save you a ton of money in legal fees if you can nail the purchase agreement as close to perfectly the first time. This may be the best advice I got thanks to Brian A. Hall and Steve Schaffer. 2️⃣ Many founders get fired or leave shortly after selling. I got fired a year and a half in. I was self conscious until every VC/Investor and entrepreneur I knew called me the week it happened. They all said “congratulations” and “what’s next? How can we help?” That was an awesome feeling. 3️⃣ Operate as though you’re always about to sell. Our deal from LOI to close was 30 days, which is insanely fast. This was only enabled because of great accounting and HR practices. Messy records makes diligence hard and can kill your deal. Don’t be an operational slob. It’s not a good look when people look under the hood. 4️⃣ Earn outs and bonuses are never guaranteed. During negotiations everyone loves one another, but after the ink dries things can go south. I’ve heard it from other founders who’ve experienced it first hand. Targets attached to revenue, EBITDA, etc are easy to manipulate after the fact, so if you’re going to agree to earn outs tied to that or your employment at the company, make sure you consider all of the “what ifs.” What if I’m fired? What if you change company strategy? What if the definitions change? Be wary of earn outs unless you’ve got a rock solid set of attorneys and advisors that craft bullet proof plans. Better yet, just call Brian A. Hall. Best money we spent. 5️⃣ If you want to meet every financial advisor on the internet, just share that you’ve sold your company publicly. They’ll ALL call you. More importantly, have a plan and an advisor well ahead of your liquidity moment. The day wires are sent is a bad day to decide what to do with the money. You’ve worked hard to get there, have a plan for what to do with the fruits of your labor. ➡️ Bonus - selling a company that you’ve built can be an emotional rollercoaster. I describe it as being like a former President the day after the new President is sworn in. You still might get the daily intel briefings, and probably kept your Presidential slippers. But no one cares quite as much what you think, and your powers are limited compared to yesterday. Finding new purpose can be a complex process, and in my case I’ve found a lot of fun ways to stay busy. But it’s not a clear straight line and it can be emotional saying goodbye to control over something you’ve poured your heart into. Anyway, that’s it. Those are the lessons I had top of mind and in discussions with some folks considering exiting soon. Let me know if you want to hear more. #entrepreneurship

This misunderstanding in RIA M&A transactions can cost you $$$.   Let’s talk about CAGR or compound annual growth rate to achieve earn-outs. I’ve watched sellers nod along in sales negotiations, only to realize too late that what they thought it meant, and what it actually means, are two very different things. Here’s the mistake: Sellers see a 15% CAGR target over three years and assume that means they just need to grow revenue by 15% over the full term to get the full earn-out. So, starting at $1 million, they think the goal is to hit $1.15 million by year three. Unfortunately, that’s not how CAGR works. CAGR is about compounded growth—15% per year, not 15% total. That means your year-three revenue needs to hit just over $1.52 million, not $1.15 million. It’s 1.15 × 1.15 × 1.15, not a one-time bump. And when your earn-out hinges on hitting that number, this kind of miscalculation can turn into a very expensive surprise. If your deal includes a growth-based earn-out tied to CAGR, make sure it’s spelled out—clearly. Ask for a revenue schedule that lays out the milestones. Better yet, talk through the math with the buyer before the agreement is signed. You don’t want to find out what CAGR really meant after you’ve spent three years building toward the wrong target. Have you seen this happen before? Are you going through it now? I’d love to hear your take and maybe help a few others avoid this trap along the way.

‘𝗖𝗮𝘂𝘀𝗲’: 𝗧𝗵𝗲 𝗠𝗼𝘀𝘁 𝗘𝘅𝗽𝗲𝗻𝘀𝗶𝘃𝗲 𝗪𝗼𝗿𝗱 𝗜𝗻 𝗙𝗼𝘂𝗻𝗱𝗲𝗿 𝗘𝘅𝗶𝘁𝘀 Selling your company is exhilarating—but if your post-closing employment agreement has a vague ‘cause’ provision, you might be leaving millions on the table. 💸 𝘞𝘩𝘺? Because in M&A, ‘cause’ can mean the difference between getting what you’ve earned—or being short-changed. 𝗖𝗮𝘂𝘀𝗲: 𝗧𝗵𝗲 𝗦𝘂𝗯𝗷𝗲𝗰𝘁𝗶𝘃𝗲 𝗗𝗶𝘀𝗮𝘀𝘁𝗲𝗿 When ‘cause’ is loosely defined—like “failure to meet board expectations” or “not dedicating enough time”—buyers can use it to trigger termination in their subjective discretion. And when that happens? Severance, rollover equity, and earnouts can disappear. 𝟯 𝗖𝗼𝘀𝘁𝗹𝘆 𝗖𝗼𝗻𝘀𝗲𝗾𝘂𝗲𝗻𝗰𝗲𝘀 1️⃣ 𝗥𝗼𝗹𝗹𝗼𝘃𝗲𝗿 𝗘𝗾𝘂𝗶𝘁𝘆: Cause termination often leads to repurchasing equity at a discount—or worse, complete forfeiture for no value. If you’re banking on the company’s future, this is a disaster. 2️⃣ 𝗘𝗮𝗿𝗻𝗼𝘂𝘁𝘀: Earnouts can vanish entirely or become impossible to achieve if you lose operational visibility. Let’s be honest—if you’re out, what incentive does the buyer have to pay you? 3️⃣ 𝗡𝗼 𝗦𝗲𝘃𝗲𝗿𝗮𝗻𝗰𝗲: Without tight definitions, severance and bonuses disappear in a ‘cause’ termination, leaving you high and dry. 𝗛𝗼𝘄 𝗧𝗼 𝗣𝗿𝗼𝘁𝗲𝗰𝘁 𝗬𝗼𝘂𝗿𝘀𝗲𝗹𝗳 Keep ‘cause’ definitions narrow and objective—think: —𝘍𝘳𝘢𝘶𝘥 —𝘍𝘦𝘭𝘰𝘯𝘺 —𝘐𝘯𝘵𝘦𝘯𝘵𝘪𝘰𝘯𝘢𝘭 𝘮𝘪𝘴𝘤𝘰𝘯𝘥𝘶𝘤𝘵 Once you’ve tightly limited ‘cause,’ negotiate for substantial rights on termination ‘without cause’: —𝘈𝘤𝘤𝘦𝘭𝘦𝘳𝘢𝘵𝘦𝘥 𝘦𝘢𝘳𝘯𝘰𝘶𝘵𝘴 —𝘍𝘶𝘭𝘭 𝘴𝘦𝘷𝘦𝘳𝘢𝘯𝘤𝘦 —𝘕𝘰 𝘪𝘮𝘱𝘢𝘤𝘵 𝘵𝘰 𝘳𝘰𝘭𝘭𝘰𝘷𝘦𝘳 𝘦𝘲𝘶𝘪𝘵𝘺 𝗧𝗵𝗲 𝗕𝗼𝘁𝘁𝗼𝗺 𝗟𝗶𝗻𝗲 Think hard and negotiate harder. ‘Cause’ might look like a footnote in your agreement, but it can cost you millions. It’s one of the trickiest—and most overlooked—aspects of founder exits. 𝘓𝘰𝘤𝘬 𝘪𝘵 𝘥𝘰𝘸𝘯, 𝘰𝘳 𝘱𝘢𝘺 𝘵𝘩𝘦 𝘱𝘳𝘪𝘤𝘦. #Mergers #Acquisitions #PrivateEquity #Founders

This Private Equity Deal Almost Fell Apart – Until We Fixed This One Clause The deal was nearly dead. I represented a seller in a private equity-backed acquisition of a fast-growing SaaS company in Texas. Everything looked good—until we hit a clause in the Share Purchase Agreement (SPA) that made my client pause. The earn-out provision was structured to take on all the risk for the seller. If the company didn’t hit aggressive revenue targets over the next two years, a significant portion of the purchase price would disappear. The buyer, a seasoned private equity firm, called it “standard.” But I knew better. Here’s why it was a problem: The targets were based on unrealistic growth assumptions, making it nearly impossible for the seller to receive the full payout. The buyer had full control post-closing, meaning they could strategically make decisions that would hurt short-term revenue, reducing the earn-out payout. The PE firm had no downside—it would acquire the company at a discount if the targets weren’t met. I pushed back with multiple Zoom meetings. After intense negotiations, we restructured the earn-out to ensure: -> A baseline guaranteed payout, regardless of future performance. -> Revenue targets were adjusted based on historical growth trends. -> A dispute resolution mechanism The deal closed, my client received the payout they deserved, and the PE firm received a solid investment. Lesson? In private equity deals, contracts are not just paperwork—they’re battlegrounds. One clause can shift millions of dollars. Have you ever faced a contract clause that almost killed a deal? #PrivateEquity #MergersAndAcquisitions #CorporateLaw #PEDeals #M&ALaw Ramanuj Mukherjee Sylvain Dhennin Bruce Embley Jeremy Leibler Mustafa Siddiqui Patrick Scott Robin Khuda Reid Hoffman Teresa Hill