Q: I am looking into buying a medium sized insurance brokerage that specializes in auto insurance. The current owner is very much involved in the business. He knows all of the clients personally, and even has many of them as friends and social acquaintances. Also, his name is the name of the company. Needless to say I would like to keep him on for a very lengthy transition period. What thoughts do you have on structuring an earnout in a situation like this? I want to keep him motivated, but don't want to give away all of my future upside.
A: This is a common predicament in personal service businesses. Clearly, if the seller is "the business" you'll want to consider all of the ramifications that will come once he walks out the door. An earnout may be an option for you however, I am not 100% certain what it is that you expect to have the seller "earn" when in fact you're looking more to having a deal whereby the business will continue at current levels at least. For example, an earnout makes sense in some of these situations:
In the situation you cite, I think that having a proper deal in place that adequately protects you after the closing to ensure that there's a smooth transition is what you need. Furthermore, there are no real customer concentration issues or matters that one would usually tie to an earnout.
Here are things to consider:
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|Richard Parker is the author of: How To Buy A Good Business At A Great Price, the most widely used reference resource and strategy guide for buying a business. He has purchased ten businesses in his career and has helped thousands of prospective buyers worldwide learn how to buy the right business for sale. He is also founder and President of Diomo Corporation - The Business Buyer Resource Center.|