Dashboard: It’s Not That Earnouts Are Bad. It’s That Bad Earnouts Are Bad

Conventional wisdom about selling a business is pretty clear: If at all possible, get your money at closing. Don’t leave a big chunk of the purchase price dependent on the future performance of a business you no longer control. David C. Barnett, who helps people buy and sell businesses, has challenged that conventional wisdom, arguing that earnouts and other forms of deferred payment can sometimes help buyers and sellers get better deals done. Josh Patrick, who has owned and sold businesses himself and advised many other owners through transactions, is more skeptical. Which is why I was kind of hoping for a fight.Instead, Dave and Josh end up agreeing on quite a lot—including that once a seller decides to leave money in a deal, choosing the right buyer becomes every bit as important as negotiating the right price. Can the buyer actually run the business? What happens if things go wrong? What information should the seller continue to receive? And how can the deal be structured so that both sides have an incentive to make the transition work? So no, this isn’t quite the earnout cage match of my dreams. It’s actually far more insightful than that. The episode is brought to you by Grasshopper Bank.