You know how earnouts work?

It’s like putting your kid on a leash. ‘You get to run around, but if you pull too hard, I’m reeling you back in.’

Keeps everyone in check and mitigates unnecessary risk!

How Earnouts Work 

• Why Read:

  • Understand earnouts in M&A deals, including their purpose, structure, and prevalence. This knowledge is crucial for negotiating favorable terms during potential acquisitions.

• Featuring:

  • CJ Gustafson (@cjgustafson222), CFO at PartsTech

• Link: 

  • “Your Complete Guide to Earnouts”

Key Concepts and Tactics:

• Understanding the Purpose of Earnouts:

  • Point: Recognize that earnouts are a tool to bridge valuation gaps and mitigate buyer risks in M&A deals.

  • "Earnouts, AKA 'getting paid later', are a variable component to an acquisition's purchase price."

  • "These arrangements help buyer and seller bridge the gap between each side's perceived valuation, while putting guardrails in place to safeguard the buyer against certain risks. Earnouts essentially ask the seller to 'prove' a component of their worth."

  • "Said another way, the earnout is often funded in part by the performance of the seller's business. So it kinda pays for itself. Plus, there's less risk of overpaying for a business."

• Identifying Risks Buyers Hedge Against:

  • Point: Be aware of the types of risks buyers aim to mitigate through earnouts.

  • "Types of risk the buyer is hedging against:

    • Ensuring key employees keep their heads 'in the game' and performing after receiving a whack of cash

    • Closing important in-flight deals (like a big enterprise agreement or government contract)

    • Retaining key customers upon renewal

    • Finishing key products"

• Understanding Typical Earnout Structures:

  • Point: Familiarize yourself with common earnout lengths and sizes.

  • "Typically one to three years. I've seen five years on the higher side, but at that point it's more like indentured servitude...”

  • “Cash upon closing usually represents between 70% and 80% of the transaction value, while earnouts and escrows represent the remaining 20% to 30% of the purchase price."

• Recognizing the Prevalence of Earnouts:

  • Point: Understand how frequently earnouts are used in M&A deals and why.

  • "According to Harvard Law, in 2023 about 37% of M&A deals included an earnout"

  • "Current usage of earnouts remains above the historic, pre-pandemic rate... This makes sense. There's more doubt about valuation in tougher economic climates. And it becomes a buyer's market where they will want to put protections on deals if they can."

• Distinguishing Between Private and Public Company Deals:

  • Point: Recognize that earnouts are more common in private company transactions.

  • "Earnouts are way more prevalent in private company transactions than public. This is because private companies tend to have more 'grey areas' within their books, and their longer term performance may not be proven."

• Considering Different Perspectives on Earnout Metrics:

  • Point: Understand the differing preferences of buyers and sellers regarding earnout metrics.

  • "Generally speaking, sellers view revenue goals more favorably than earnings goals, as they have more control over the latter once they step into the business. And buyers generally prefer earnings goals, as they are a better proxy for deal value"

How to Get Your First 50 B2B Customers

Why Read: 

• Learn effective B2B sales strategies, including defining ideal customers, targeting key decision-makers, and tailoring outreach based on company size.

Featuring:

• Kera (Zacuto) DeMars (@kerademars), Head Of Marketing at Hustle Fund

Link: 

• “How to land your first 50 customers—from a sales ninja”

Key Concepts and Tactics:

• Building an Ideal Customer Profile (ICP):

  • Point: Define the characteristics of your ideal customer to focus your sales efforts effectively.

  • "Note the characteristics of a company that will make the best fit for the solutions you provide. You can sell your product to these companies the fastest because they need it. For example, Armand narrowed Carta's ICP to mid-size private companies that raised an institutional round in the last 6 months."

• Identifying Key Decision Makers:

  • Point: Target multiple stakeholders within a company to increase your chances of closing a deal.

  • "You can't just contact one person at a company and call it a day. It doesn't work that way. You'll have to connect with 3-5 people per company. That's because there are three types of buyers: The champion or 'at the line' person, The 'above the line' person, The 'below the line person'."

• Engaging the Champion:

  • Point: Focus on identifying and persuading the primary user and promoter of your product within the target company.

  • "A champion is someone who will buy and promote your tool. These are department heads or directors. They own the department that will use your tool daily. For Armand's sales strategy at Pave, these were the Directors of People Operations or Heads of Compensation. You should figure out your champion first. Get on a call with them to demo your product and explain how it will solve their problems."

• Securing Buy-In from Economic Buyers:

  • Point: Involve decision-makers who control the budget in your sales process.

  • "These are economic buyers. You won't have them on every sales call, but you need their agreement because they'll write the check for your product. At Pave, a compensation management platform, Armand was often looking for the CHRO or the Chief People Officer. Armand recommends that once you persuade and onboard champions, ask them to broker a call with the 'above the line' person. You can then get their buy-in to accelerate the deal."

• Onboarding End Users:

  • Point: Engage with the actual users of your product after securing buy-in from higher-level decision-makers.

  • "These are the people who'll actually use the tool. For example, the 'system admins.' You'll have to teach them the technicalities of your product. Ensure you talk to them only after you've got the buy-in from the 'above the line' and 'at the line' people."

• Tailoring Outreach Strategy to Company Size:

  • Point: Adjust your prospecting efforts based on the size of the companies you're targeting.

  • "If you sell to SMB companies (4-figure contracts), target 50-60+ companies and 3-5 contacts per week. If you sell to mid-size companies (5-figure contracts; usually $20-$50K), target 25-50 companies and 3-5 contacts per week. If you sell to enterprise companies (high 5-6 figure contracts), target 10 companies and 5-10 contacts weekly. This is how you create a BIG list of prospects for your outbound sales strategy."

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