Welcome to the mid-April edition of our newsletter. We just returned from the CompTIA Annual Member Meeting in Chicago. Along with about 30 colleagues from around the country we unveiled the new IT Business Growth Professionals (BGP) community. This is a group of leading coaches and consultants who are focused on advancing the professionalism of BGPs and creating best practices and tools for working with clients. CompTIA will be promoting the group's services, including strategic planning, service model enhancement, sales and marketing development, and financial management, to its thousands of members.
At Austin Dale Group our services are mostly centered around business transaction activities that occur late in the life cycle of a business, such as exit planning, valuations, mergers, and acquistions.
Now we have more options and resources than ever - including the IT BGP community - to help owners who are considering selling their company or optimizing it in anticipation of a future merger or acquisition. Give us a call if you would like to discuss your plans and see if we can help you or one of your associates.
John W. Austin and Bob Dale
info@austindalegroup.com
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What is an Earnout and Why are Earnouts Used?
An earnout provision in the sale of a business is a method of compensating a seller for future sales or profits. Earnouts are typically used to bridge the buyer's desire to buy based on yesterday's earnings or sales and the seller's desire for a price based on tomorrow's profits or sales.
An earnout is usually based on a percentage of any increase in sales or profits after certain levels have been reached. They are normally time-limited from one year to no more than five. An earnout, if properly structured, should benefit both sides of the transaction.
When to consider an earnout:
- The buyer has limited investment capital.
- The price gap between buyer and seller is significant.
- The business is a relationship business.
- The company is introducing new products or services.
- The earnout serves as an incentive for the seller to stay with the company.
- The seller wants a very ambitious price.
- The firm may be losing money, but is on the verge of profitability.
- The company may have major customer concentrations.
- The company is receiving a very large contract or order.
Potential problems with an earnout:
- The buyer and seller don't trust each other.
- Many earnouts may be difficult to administer.
- It may be difficult to agree on the terms and conditions.
- There may be adverse tax consequences to one or both sides.
- An earnout may adversely affect the buyer's operation of the business.
There are as many reasons why an earnout provision make sense as there are reasons why they don't. An earnout can be used for any reason where creative deal-making may be necessary. But most experts think that unless an earnout is necessary to make the deal work, they should not be used. |
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Why Deals Fail to Close -- Some Red Flags
There are dozens, perhaps hundreds, of reasons why business acquisitions fail to close. Everything can be fine -- price and terms agreed upon, a letter of intent signed -- and then everything starts to unravel. If "the devil is in the details," here are a few of the devils:
For Sellers:
- Having unrealistic expectations
- Seller's remorse - having second thoughts about selling the business
- Being inflexible on price and terms or insisting on all cash
- Not paying attention and/or not cooperating with intermediaries and other professionals involved in the selling process
- Allowing the company's sales and earnings to deteriorate during the selling process
- The seller coming across as a one-man band
For Buyers:
- Not having the capital or financial resources to do the deal
- Losing patience during the acquisition process
- Understanding that the "near perfect" fit will bring a premium price
- If inexperienced in the deal making process, failing to lean on experienced advisors
Buyers and sellers should understand and accept the fact that the easy deals of the 90's are over - at least for now. Deals are more difficult these days. |
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2010 Private Equity Deal Flow Up 11%
The U.S. private equity industry, by many measures, turned in a good year in 2010, despite the overall poor economic conditions and turbulent financial markets. There was a steady increase in PE investment in private companies during the year culminating with $50 billion invested during 4Q, 6.25x more than the low of $8 billion invested during 2Q 2009. In total, $132 billion was invested by PE firms in U.S. companies during 2010 - the fifth highest one-year total on record. Deal flow was up 11% from 2009 with a total of 1,498 PE deals during 2010.
The past year presented private equity firms with a number of challenges, but still the industry managed to bounce back surprisingly fast from the lows of 2009. Having turned the corner, look for the positive trends that developed in 2010 around deals and exits to continue in 2011. While a number of challenges do remain, the outlook for 2011 and 2012 appears to be bright. Of course most private companies (and most of our clients) are not candidates for private equity investment, but this is still a good omen for the small and mid-sized business-for-sale markets. (Source: pitchbook.com)
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