This is the second supporting post, further elaborating on “In Tough Times, your Acquisition Offer Might be an Asset Sale“.
6. How will you be compensated for these assets? Cash? Up front or over time? Equity in the acquiror? With an earnout?
Cash up front always seems like positive – there’s no reneging on the deal, you’e got the cash. But again, that lump of cash seems to big and juicy, your shareholders will want theirs right away. But you can’t let it go that easily. You’ve got all this work still to do and you’ve got bills to pay!
If you have a C corp, the tax implications aren’t that thorny, but if you have an LLC and get it all up front, there are tax issues to deal with, especially if you are selling towards the end of a year and need money across the year end boundary!
What about part up front and the payouts over time – it could even be quarterly.
Some acquirors will want to pay in their equity. This is a good news/bad news scenario. If they’re public, the stock is liquid and you don’t have lockups, then you know exactly what you’re getting. What if you’re selling to a private company? Then do your due diligence because you’re now an investor and likely have little or no control!
As a rule of thumb, I suggest getting at least 1/2 of the purchase price in cash/up front. Then consider payouts over time, equity etc.
Now what about earnouts? Just say no! Few if any teams ever get enhanced value from earnouts – why? Because it’s not in the acquirors interest to pay you any more! And, beause they have all the control, it is easy to adjust the circumstances so they don’t owe you. Remember that plenty of acquirors just want to shut down competition, so that’s the easiest move, just shut it down and voila, no earnout. But they now manage the sales process, the level of marketing, the speed of new features etc. All of the assumptions that you might have may no longer be valid.
So just assume if they insist on an earnout that you’ll never see a penny and then you won’t be surprised.
Each part of the series is available at the links below.