Anyone who has been involved with deal-making for any length of time has probably encountered a disconnect between the expectations of the seller and the buyer.  One way to bridge that expectations gap is to include an earn-out provision in the structure of the deal.

Our firm had an assignment to sell an on-line retailer of stationery and related products.  After several years of success, the owner thought the business was capable of sustaining itself without his day-to-day presence.  During the subsequent two-year period, top-line sales declined by more than one-third.  In spite of the decline, the owner insisted that the business had intrinsic value that was not reflected in the sales.

We identified a strategic buyer who agreed that the business had value, but maybe not to the same degree as that of the seller.  An earn-out would provide the solution.

The deal was structured to include 25% cash paid to the seller at Closing, a seller note for 35%, and an earn-out for the 40% balance, which was to be paid in quarterly installments.  There are many ways to structure an earn-out, but in this case, the buyer and seller agreed that the earn-out would be calculated on a percentage of gross revenues. 

When representing the seller, we also like to see language that calls for immediate payment of the remaining balance of unpaid seller notes and earn-outs in the event that the business is re-sold during the term of the seller note and earn-out.

In this case, we structured a win/win/win deal.  The seller achieved his financial objective.  The buyer gained entry into a sought-after market.  Dailey Resources was paid in full at Closing.