Earn Out vs Upfront Cash in an Acquisition
Recently, I met with 3 different entrepreneurs that each had been acquired for significant amounts. However, the structure of the acquisitions was very different in each case and led to drastically different end results. Here are the 3 general deal structures:
- 100% upfront cash, no long-term earn out
- 50% upfront cash, 50% earn out over time
- 5% upfront cash, 95% stock options
The most shocking was Number 3 which saw the price per share plummet to just 2.5% of the acquisition-level value before they could be executed. Number 2 also does not seem on track to earn the full 2nd payment for a variety of reasons. Number 1 is by far the cleanest and happiest outcome for the entrepreneurs involved.
Interestingly, Number 1 also seems to be best positioned to thrive within the acquiring company, begging the question if earn outs really do much to improve the chances of a successful acquisition outcome for the acquiring company.
I’m thankful for the stories of entrepreneurs that have gone before and tested various deal structures. All evidence seems to point to upfront cash as the clear structure-of-choice.
Do you have a preferred deal structure for acquisitions? What structures have you seen achieve success for the entrepreneur and for the acquiring company?