

Inside the Mind of a Billion-Dollar Acquirer - robot
http://www.inc.com/articles/201109/inside-the-mind-of-a-billion-dollar-acquirer.html?nav=featured

======
joshfraser
I talked to one of my friends in M&A @ one of the top tech companies the other
day. I was surprised to hear that their target is a 55% success rate for
companies they acquire. They want it to be slightly better than a coin toss,
but not so high that they over-think any deals. Their logic is that it's okay
to have 50 failed deals, as long as they're the guys who find the next
YouTube/Hotmail/PayPal.

~~~
PakG1
That's interesting. I bet that companies require acquihires to have a higher
percentage of success (where I presume success here means the team staying,
since the product is often shut down in acquihires). I wonder what M&A people
would think would be a good percentage for acquihires.

------
nlh
There was a post/link I read here recently that discussed the earn-out issue
in depth and it's really colored my thinking on it (BTW - if someone can
remind me whose post it was or point me in the right direction, that'd be
hugely appreciated). I think they nailed it.

Basically the idea was this: When you sell your business, you should be paid
-- in cash -- for the value you've created. That's what a sale is, and that's
what a sale should be.

An earn-out represents value that _is yet to be created_ \-- the future
interaction between your business and the acquirer's business. There's nothing
wrong with that inherently, but recognize that it's really just an incentive
for what is to come, not payment for what was done.

Now, none of this is saying that you shouldn't accept a deal with an earn-out
if that's what you've got in front of you. But you have to think about it
differently --

If you built a business that you think is worth $100M and you sell it to BigCo
for $100M, 50% of which is structured as an earn-out given revenue targets
over 3 years - guess what....you didn't actually sell your business for $100M.

You sold your business for $50M and agreed to a $50M compensation package in
your new job. And with that new job comes the uncertainty of what your new
owners will do. They could, conceivably, decide to close your division and lay
everyone off after 6 months - having absolutely nothing to do with you or your
team (this happens in big companies).

So when the time comes, just make sure you have the right perspective about
what price you're actually selling your company for.

------
frenchman_in_ny
The other issue with the earn out, from the entrepreneur's point of view, is
that you're providing the acquirer with effectively interest free financing
for the earn out, while you're working on integrating. And there's nothing
guaranteed in the earn out, and they're usually all-or-nothing structures (ie,
get $0 if you hit 99% of target)

------
codeonfire
Why would a business owner agree to an earn-out? That's like handing someone
your equity and trying to earn it back from them over three years. I assume
this is for acquisitions of unprofitable companies, otherwise traditional
valuation methods could be used to determine the price. Buyer beware is a lot
better system.

~~~
djt
Beacause it takes risk away from the purchaser, making it (hypothetically) an
easier sale and worth more money. Mergers are extremely susceptible in the
first 12-24 months and can actually take down the parent company if
mishandled.

~~~
codeonfire
Yeah, but if they are told to meet a specific EBITDA, and the parent is
charging expenses to the company, it would be in their interest to charge
enough that the earn-out doesn't pay. If the parent gets to write checks with
the company's money, then the earn-out goals should be on gross revenue.

------
enuncajon
I'd love to have to deal with some of the earn-out problems discussed in this
article... The part about corporate overhead was especially insightful to me,
a good watch out. Thanks for posting.

