Buying your way to entrepreneurship

October 1, 2009

Starting a venture isn’t the only way to become an entrepreneur. Buying a business is a popular alternative. If you are considering that route, I recommend getting a rock-star business intermediary in your corner. If you are in the NYC-area, consider Sally Anne Hughes of  Hughes Klaiber. I worked with her, and was quite impressed. She’s an ex Citigroup banker who concentrates on buying and selling small and mid-sized businesses. That’s critical, because if you hire a banker who concentrates on bigger deals, it will cost you a bloody fortune, and you won’t get the same kind of specialized expertise – or someone who really cares about your relatively small deal.

Here’s an excerpt from one of her recent articles:

“One frequently used form of compensation in the sale of a business is an earnout — where a
portion of the selling price is contingent upon the future performance of the business.  I’ve seen increased interest in earnouts over the past few months, because they can bridge differences in opinion between the buyer and seller regarding the value of a business with future growth potential.

For example, I recently met with an owner of a mid-sized construction company with an interest in
acquiring a specific smaller firm. The smaller company is in a green-industry niche, and has been
growing despite the economy. However, given the smaller company’s projected growth, the seller
is looking for a valuation which the buyer feels is unrealistic given the uncertainty in the
economy. An earnout may help both sides reach an agreement.

It goes without saying that sellers prefer to receive all their compensation at closing. However, an
earnout can help a seller capture future upside potential, and can provide a financial incentive
when the seller remains with the business. Buyers are generally comfortable with earnouts
because they won’t have to pay for future growth unless targets are achieved.

However, problems do occur with earnouts, and there are important issues to consider” (click to read the full article):