The earn-out you're going to be offered (and the two findings that cause it)

Here is a prediction I can make about a founder business I have never seen: if the owner still holds the key relationships and the top customer is over a quarter of revenue, the offer - when it comes - will have 30-40% of the price deferred, at risk, tied to performance after completion. Not because buyers are cynical. Because of two findings, and the arithmetic behind them.

Finding one: the business needs you. A buyer is purchasing future cash flows. If the sales engine, the pricing decisions and the ten relationships that matter all route through the founder, then the future cash flows walk out the door at completion unless something makes them stay. That something is the earn-out. It is not a negotiating tactic; it is the buyer's insurance policy against a risk you built. From the buy side, I never once deferred consideration for fun - I deferred it because the seller's own org chart told me to.

Finding two: the revenue is concentrated. Thirty-plus per cent with one customer - especially uncontracted - means a single phone call can vaporise a third of the earnings the price was built on. Buyers respond three ways at once: a lower headline, a specific warranty, and an earn-out that transfers the risk of that phone call back to you. You keep the risk; they keep the option.

The arithmetic of reduction. Both findings are reducible, and the payoff is not subtle. A twelve-month relationship-transfer program - documented pricing authority, key accounts moved to a tested second layer, the founder demonstrably absent from the weekly rhythm - directly attacks finding one. A contracting program on the top five accounts, ideally with multi-year terms and renewal evidence, attacks finding two. In bridge terms these are routinely the two largest chips in the $2m-$50m segment, and the two with the highest recovery rates.

Why timing is everything. Neither fix works in a hurry. Relationship transfer attempted during diligence is visible and desperate; contracts renegotiated under deal pressure invite worse terms than no contract at all. Started eighteen months out, both look like management maturity - because they are. Started six weeks out, they look like staging - because they are.

If the offer has already arrived, the findings are what they are - but structure is still negotiable when you can name the doubts and show the mitigation already underway. An earn-out with honest metrics, a cap, a floor and governance you can live with is a different instrument from the one in the buyer's first draft. Know which doubts drive which strings, and negotiate the doubts.

The uncomfortable summary: the earn-out percentage in your future offer is being set right now, by decisions about delegation and contracting that feel nothing like deal decisions. They are the deal decisions.