Shark Tank’s Kevin O’Leary on How to Structure Your Earn-out
“When Kim Walsh-Phillips decided to sell Elite Digital Group she took to heart valuable insights provided by Shark Tank’s Kevin O’Leary. Kevin pointed out that when entering into an earn out that involves relying on the businesses future financial performance, make sure you get the rights to financial reports prepared by a recognized accounting firm. This will keep your buyer honest and eliminate the use of in-house reports,” shares Sam Thompson a Minneapolis business broker and the president of M&A firm Transitions In Business.
Kim Walsh-Phillips founded Elite Digital Group, a marketing agency for clients looking to leverage social media. Walsh-Phillips built her firm to $3.2 million in revenue, but she got stuck when she reached 30 clients.
No matter what she did, Walsh-Phillips couldn’t break through the 30 client ceiling.
Frustrated, she decided to sell and, within months, had three offers and sold for $450,000 upfront and a downstream set of payments tied to her company’s performance after she sold it. There’s a lot to ponder in Walsh-Phillips’ story, including:
Protect Your Earn-out: Before selling, Walsh-Phillips had the opportunity to attend an event where Shark Tank’s Kevin O’Leary offered her some sage advice: when structuring a deal that involves future payments (i.e., earn-out, licensing agreement, etc.), make sure you get the rights to financial reports prepared by a recognized accounting firm. O’Leary argued that, since the accounting firm’s reputation is at risk, they are much more likely to provide truthful sales data than an acquiring company motivated to fudge the numbers.
Pick one: Walsh-Phillips tried to run two businesses simultaneously, and whenever she focused on one, the other suffered. Instead of juggling both, she decided to sell one to commit 100% to the other.
Document Your Processes: Walsh-Phillips documented their entire process for working with a new client right down to precisely what they should get from her team on each of their first 90 days as a client. In the end, it was those processes that were a big part of what her acquirer ended up buying.