I'm guessing I'm not alone with this, but if I'm being honest I gave very little thought to the earnout in the run up to selling my business. Everything I did or thought about for the 5 months prior to signing day was about getting to signing day (read about it here).
For anyone not aware of what an earnout is, it's a mechanism often used when selling a business to allow the founder and shareholders of the business that's being acquired to realise some of the ongoing upside, assuming the business continues to grow. Great for the founder as they get the opportunity to make more money and great for the acquirer as it keeps the management team of the acquired business super motivated.
As we discussed details of the earnout when getting the deal together, it's safe to say that any and all conversations about it were positive. It was all about the potential and no real thought about any possible pit falls. No surprise really as no one goes into these types of deal expecting them to fail. But having since spoken to many other founders that sold their business, I'm yet to find a single one where the earnout went 100% well.
The concept is good, but the reality is slightly flawed by that fact it involves humans rather than robots. And not just any humans, but founders.
Our earnout was pretty simple in its design. We had financial targets to hit each year and if we hit them, we would be rewarded. When negotiating the deal this all seems fine, but the thing that really struck me shortly after earnout day one was the fact that there is a set time frame where we have to achieve the goal and if we don't it's lost. Previously when running the business there was always the fall back of "well we always have next year". But in an earnout the clock is ticking. You have to hit a specific target within a specific timeframe or that value is lost forever. And if you don't hit the first target then it's almost certain that you won't hit the next and the next.
What I'm trying to get at with the above ramble is, it's really bloody stressful. And to make it worse, you've just gone through a crazy and exhausting period of due diligence, negotiations and integration planning with the only thing keeping you going, the thought of how relaxing life will be once you sell your business.
I reckon this was day 5 of me being 'rich and successful' and I felt worse than I ever have. Stressed to the point of sweating, randomly. Not a pretty sight.
But like any good founder/sociopath I masked these feelings and got on with the job at hand.
The team took the news of the acquisition well which felt like a win, as that had been a key part of choosing which buyer we should go with. Everyone at Brainlabs was really nice and welcoming and we starting introducing ourselves and our product to the wider business. As a management team it was our first glimpse at the wider marketing world outside of the Amazon bubble and we had big expectations of securing some cross sells and winning some bigger clients.
A highlight of the earnout for me was getting to visit our teams in San Sebastian and Sao Paulo for the first time.
Two things hit me straight away about my new life as an employee instead of an owner. Firstly, I went from knowing absolutely everything about the business I was running, why we would make decisions, future strategies etc to just knowing specific metrics related to my part of the larger business. I found this really difficult and had really got used to being able to make decisions based on top line strategy. Suddenly I was having to second guess why things were being asked of me or what the wider business had planned for us. And the second was pace. Our success as Molzi was built on pace. Decisions were made quickly, processes were updated or changed quickly, new investments were started and stopped quickly. But suddenly we had a sign off process. A very short sign off process but still enough to make a noticeable difference to how we worked.
It became clear after the first month or so that there would be no automatic bounce from being acquired. In fact, we needed to work a bit harder just to tread water as much of our time was being taken with integrations systems and processes. We were still on track to hit our first earnout target, but not by a comfortable margin.
When I did the deal, I was at peace with the fact that only day one money was guaranteed and anything else we got was a bonus. But by now, I was 6 months away from the first earnout payment and I wasn't going to let it slip through my fingers. My strategy when running Molzi was always to focus on 6 months ahead and try to make big needle moving impacts on revenue. But I quickly reverted back to startup style month-to-month planning. Chasing down every deal, making sure work was complete so we could invoice. Real hustling to make sure we got over the line for year one.
We hit the number, and in fact exceeded the target by a comfortable amount. Great you might think, time for Chris to stop stressing and sweating. But no, we then had around 6 weeks where the earnout accounts would be formally prepared and audited against the terms in the contract. My brain reverted back to being a pain in the arse and started imagining all the reasons why maybe deals wouldn't count, or revenue would be recognised differently. I unhelpfully managed to persuade myself that probably we wouldn't hit the number after all and had a very painful 6 weeks waiting for the official confirmation.
The stress wasn't helped by the fact that we found our dream home in the meantime which was about 50% more expensive than we had planned to allocate to a new house. So all of a sudden we needed the first earnout payment (I appreciated that 'needed' is maybe an exaggeration, but you know what I mean).
On the final day of the 6 weeks waiting period the confirmation came through. The email was quite long with various calculations. But one sentence stood out "please confirm you approve and we will make the transfer". I didn't even read the rest of the email. We had hit the earnout, I didn't even care what the specific number was. My whole body relaxed and I went for a walk. This was by far the most stressful period of my life and it was over.
Molzi may have new owners, but we kept the same quality Christmas decorations. This picture was from February though - we were never good at taking them down again.
I think, without realising maybe, this was the moment I was done. I was still mid earnout but I'm not sure my body could cope with any more. I had achieved more than I had expected from the deal and I was a bit broken.
Planning for the next targets was made harder by the fact that we had been so much in the day-to-day that we had neglected the longer term strategy that would help us hit future targets. I also started really noticing at this point that my influence over the performance of the business was reducing. Purely because Molzi, as part of Brainlabs was advancing, in terms of pitching style, processes etc and it was leaving me behind. I was holding it back more than I was propelling it forward.
I had mixed emotions at this stage, around a year into my life at Brainlabs. On one hand, I was able to take a bit of a step back and recover from the madness of the last 5 years. But at the same time I felt a bit guilty that I wasn't doing as much. I really didn't want to be the founder that just slopes off after getting what they want. But I just wasn't adding value and all of the bits I used to do while at Molzi were now being done by much more experienced and competent agency people. My skills are definitely better suited to the 1-50 people business rather than the 1,000+.
At this stage I started thinking about leaving. But while the dream of starting and selling a business had been about meaning I could do whatever I wanted afterwards, the reality was I had no idea what I wanted to do. There were only so many things I could fix around the house, especially as my level of ability is pretty low in that area. Most fixes resulted in an emergency tradesperson arriving shortly afterwards.
I kept reminiscing about the good old days of Molzi. When it was a small team, us against the world. I wanted that again, but maybe without the stress that comes with being the CEO. So I started forming ways and ideas of how I could work with businesses like Molzi to support them in replicating our journey to some extent. Once the ideas started coming, the A4 paper of scribbles started flowing and almost instantly I got back the excitement.
I started writing this blog as a way of finding new founders and agencies that could be interested in my journey and I've not looked back.
I finally left Brainlabs, around 18 months after the acquisition. I absolutely loved working with the joint Molzi and Brainlabs teams, I loved the environment and culture that existed. I just think I'm a bit broken as an employee now and I didn't properly prepare myself for what happened in an earnout. But, armed with some of my own experiences I hope to be able to help other people in the future so they don't have to spend a year of their life sweating too. How's that for a KPI.
If you liked this blog, you might also like my Linkedin newsletter giving updates from building my three new business babies - FounderON, Kitchimo & The Ten Club.
Check it out here - https://www.linkedin.com/newsletters/7107774786386190336