I have just recently done my 309th corporate finance transaction and when I help someone sell their company I always say that, unless there is no other option, an owner manager needs to exit the business with their cheque firmly in their hands as soon as possible.
Three of the 309 transactions involved a personal investment from myself and, although my mantra is all is well and good in theory, in practice in order to maximise value on a deal, nearly always some sort of deferment of the consideration is required and, very often, on an earn out basis.
But the fact is, and I speak personally, everyday is like walking across hot coals, painful, depressing and only sometimes worth it.
In my own case it wasn’t just working for someone else, or the change of working practices, no, it was the little things (well actually not so little). Like, changing suppliers who had been lifelong contacts, changing fonts and presentation styles, changing meeting processes from informal to structured or vice versa.
Ok, I lived with this (I had to of course!) but I counted the days, if not the hours and minutes, to exit.
If you have no choice but to take such a structure into your transaction consider the following:
- Is the difference in the consideration worth the pain;
- Have you got a watertight contract, with some parachute options if you need them; and
- Are all parties 110% clear on whats expected from them and have legally committed to such unequivocally.
Even if the answer is yes to all of the above trust me, you are very unlikely to really enjoy it, but it may be more tolerable.
The other vital advice is that if its not going to way you expected once the earn out starts, deal with the issues that are causing conflict immediately. Don't let it all fester – something I was guilty of and which eventually made matters a whole lot worse, because I was, in retrospect, worrying about something that could actually have been altered to suit all our needs. But hindsight is, of course, something we would all love to have a helping of.
So, if the hindsight shop hasn’t opened yet, don't be afraid of sorting out the issues, however trivial they may seem and do it without hesitation.
Written by Jo Haigh
Head of Corporate Finance for MGR