One More Thing:Cash is king when selling a business and vendors will try to squeeze as much cash as possible out of buyers before a deal is completed.
But earn-outs are unavoidable and help new owners keep the old focused on reaching future profits they were bragging about during the sale negotiations.
Take, for example, the stockbroking and capital finance firm Merrion Capital, half of which was sold to Icelandic bank Landsbanki in late 2005.
The bank paid €27 million for the initial 50 per cent stake and it was agreed that the value of the second half would be determined by Merrion's profits over the three years after the takeover.
Given that Merrion trebled profits to €24 million in 2006 and increased them again in 2007 to €25.5 million (and this was achieved despite tough market trading, particularly in the second half of the year), the total price of the business could end somewhere north of €120 million, eclipsing Landsbanki's initial cash payment.
This shows the potential in earn-outs and taking a punt on future profits.
There's still plenty for Merrion to play for in 2008, albeit in a more challenging market.
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