4 Steps to Structuring an Earn-Out Agreement: Part 4 – Overcoming Earn-Out Burnout

By Generational Equity

08/23/2017

We hope you folks have enjoyed our in-depth introduction to creating the ideal earn-out deal structure as part of your exit strategy. Because, even if you have no intention of departing your company in the foreseeable future, it is something every business owner undertakes eventually. So, having a strong understanding of the various deal structures you may utilize to generate the greatest return on your investment is essential, and is something our advisors at Generational Equity highlight as part of our detailed executive conferences.

Already in this step-by-step series, we have covered determining the best measurements for your earn-out agreement, establishing the true growth potential of your company and your role in the new organization following an acquisition. Now in this final piece, we discuss an issue that could make the difference between fulfilling all expectations of your earn-out agreement and missing your targets; therefore not maximizing your profit. This issue is avoiding earn-out burnout.

As we highlighted in part 3, the majority of earn-out structures will expect you as the business owner to stay on board in some capacity to support the company’s new owners and help realize the targets set out in the agreement. This will involve working just as hard, if not even harder, as you did as owner to ensure your former company grows as expected. Therefore, before you agree to this, not only do you need to clarify what role you will play in confirming that expectations are met, but also reassure yourself that you will not burnout in the process.

“Just as simplicity is key, for the seller, staying true to your priorities as a business owner is equally important.” – Christine Lagorio-Chafkin

Taking Burnout into Account in your Earn-Out Agreement

Of course, you may be wondering: “How can I predict I will suffer burnout as part of my earn-out agreement?” The extent to which you suffer burnout will depend a great deal on your personality and ambitions; if you are excited by the prospect of playing a role in the evolution of your former business and motivated by a potentially greater return on investment, it is likely burnout won’t affect you as notably as someone who is reluctant to remain in employment. But, as we have discussed in previous insights exploring the effects of burnout during an exit process, even the most dedicated business owner can experience the common causes of burnout in the workplace, such as:

• Overworking
• Poor stress management
• Lack of boundaries
• Being too committed

We have met many business owners at our executive conferences that have often felt these and numerous other causes of burnout, and these can be heightened as you attempt to fulfil an earn-out agreement. The focus on your former company reaching expectations and meeting targets as part of these deal structures can be a substantial burden. So, while you are still in the process of structuring your deal, we would highly recommend the following tips to restrict the potential of burnout derailing an earn-out:

• Keep hold of several key employees: By eliminating the possibility of the business buyer to remove one or more vital employees, not only will this make fulfilling an earn-out more viable, but also ensure you have familiar surroundings and personnel by your side.
• Limit the length of the agreement: The shorter your agreement, the less likely you’ll burnout under the new parent company.
• Place precautions to prevent the buyer from intentionally preventing all aspects of an earn-out being achieved. An experienced M&A Advisor like Generational Equity can help you do this.
• Ensure you have incentives in place: What motivates you at work? As part of the agreement, guarantee you have features, targets and goals that relate to your ambitions in business, and this will help maintain your interest throughout the course of the deal.

We hope this series on earn-out agreements gives you food for thought in developing your exit strategy. Earn-out clauses are becoming more and more common in the M&A process, and our professionals at Generational Equity believe it’s important that all business owners know how to structure these effectively to inform their choice of exit strategy, whether they decide to start this process now, next year or in the next ten years.

If this series has encouraged you to learn more about these agreements and creating your own exit strategy, consider attending our complimentary executive conferences. These are held regularly throughout North America, and give attendees a firm grasp on what’s needed to sell their company for the optimal price and structure. If you’re ready to take the first step in building a buyer ready business, find a conference near you today.