Risk is a critical element of any deal, and it would be remiss of a seller to assume that future risk is entirely the acquirer’s problem. That said, acquirers often lack creativity when it comes to managing post-acquisition risk. They assume that the only way to manage their risk is through an earn-out structure: Keep the owner in the role of MD for a couple of years, and only pay out the full purchase price once certain profit warranties have been met. As I have mentioned in previous articles, this structure tends to motivate the wrong behaviour in both parties, as the seller takes no risk in their attempt to meet their profit targets, and the acquirer holds back on making the synergies really work. But what are the options and how can a seller avoid this structure?
The key to this is understanding the acquirer’s risk and finding alternative ways to manage it. In many cases, the owner of a private company does not make a good “employee” in a corporate structure, and also earns more than his or her counterpart would in that role elsewhere in the organisation. I have also seen how the skills required by the seller/MD post-transaction are very different from the skills required to run the business before the deal. I had a client once who sold to a listed company, and did so with very typical earn-out requirements. Before the deal, his role was about selling to his client base; after the deal he needed to learn to sell his services within the listed organisation. This required very different skills and created immense frustration for my client. It’s no surprise that he never earned subsequent tranches of the original deal.
So the key question to ask is: What are the risks that the acquirer is concerned about, and how can you as the seller address these? Can you find your replacement, or narrow down your role to where you add the most value? The reality is that if the acquirer cannot work out how to run your business successfully within six months to a year, then they are probably the wrong acquirer!