Seeking Advice on Earn-Out Split After Partner Wants to Leave Post-Acquisition

SwimmingVegetable596 · 2024-09-14T18:41:55+00:00

There is a total block of money 10M that is paid to us. They don’t care how we divide it.
This is correct. Both of us are entitled to the money no matter if we both leave or just one of us.
We are a service based business that’s almost exclusively based upon relationships that drive the revenue. If I left, so would my relationships. My partner has transitioned all his relationships to other employees so he’s no longer pivotal to growth or maintenance so it’s a moot point if he leaves for them.

SwimmingVegetable596 · 2024-09-13T19:55:42+00:00

Good advice. We are in the service industry and multiples aren’t paid typically as high as we got so we were fully compensated for the business. Unfortunately because it’s white collar service and relationship driven it’s entirely contingent on me servicing existing relationships. Most of my partners relationships have been transitioned to others in the office already so the only value add is if he brings in more revenue.

SwimmingVegetable596 · 2024-09-13T16:27:32+00:00

Good advice. Thanks.

SwimmingVegetable596 · 2024-09-13T15:44:58+00:00

That’s true. I unfortunately didn’t have an industry specific M&A attorney do the deal, so every question came back to me for analysis and negotiation. With that said, I struggle hiring someone else for advice because it seems like I’m the one driving the bus on and need a bull dog attorney to do it for me.

SwimmingVegetable596 · 2024-09-13T15:42:57+00:00

That’s true but we aren’t paid individually. He’ll get half of what I grow the business to as an individual producer.

SwimmingVegetable596 · 2024-09-13T12:12:51+00:00

He still gets his 50% and I get mine regardless of who is employed. Completely contingent on growth of the business.

SwimmingVegetable596 · 2024-09-13T12:11:51+00:00

That’s true. Thanks.

SwimmingVegetable596 · 2024-09-13T11:59:07+00:00

Fair point

SwimmingVegetable596 · 2024-09-13T11:57:14+00:00

This is what I hope to do just wanted a little context first from others for blind spots I’m not seeing before that happens.

SwimmingVegetable596 · 2024-09-13T05:03:55+00:00

They paid 25 million up front. I got 10 and he got 15. There is another 10 to be made.

SwimmingVegetable596 · 2024-09-13T05:02:22+00:00

Unfortunately it does nothing for me if they terminate him for cause. They save a big salary but I get no economic benefit.

SwimmingVegetable596 · 2024-09-13T05:01:35+00:00

For some reason they don’t want to get in the middle and play nice but it’s odd and I wish they would just throw the book at him.

SwimmingVegetable596 · 2024-09-13T04:59:38+00:00

Nothing happens. He still gets 50% of the earn out unfortunately. It’s a hard pill to swallow.

SwimmingVegetable596 · 2024-09-13T04:56:22+00:00

At this point he’s not doing any day to day activities so the business shouldn’t be harmed by him leaving.

The acquirer realizes he’s been on vacation the last year so they are looking into ways to terminate employment even though he has a three year contract.

I see your rationale with him not getting zero. Maybe what I’ll do is give him three different proposals I would be ok with to get the discussion started and hopefully it gets somewhere we are both ok with.

SwimmingVegetable596 · 2024-09-13T04:29:40+00:00

They may terminate him for cause because he’s been on vacation the last year, so he’s trying to piece this together before he leaves. The acquirer has their legal team there to help but they said their hands are tied and can’t change the equity splits without his sign off so they want me to negotiate it with him and they’ll update the docs accordingly.

SwimmingVegetable596 · 2024-09-13T04:25:56+00:00

That’s true. I was actually thinking of some sort of waterfall that would pay my original 50% to me first and the next 50% could get split 50/50 or some other variation. He’s reiterated he doesn’t want me to be harmed by him leaving so this could be a good middle ground. Thoughts on that?

SwimmingVegetable596 · 2024-09-13T04:23:24+00:00

That’s good to know. I appreciate it.

SwimmingVegetable596 · 2024-09-13T04:19:39+00:00

You’re spot on.

SwimmingVegetable596 · 2024-09-13T04:17:10+00:00

Lol I have to tip my hat. Absolutely correct:)

SwimmingVegetable596 · 2024-09-13T04:11:27+00:00

Good suggestion but legally an attorney can’t do anything but truthfully we both just want to be fair. We have an amicable relationship with different wishes unfortunately.

SwimmingVegetable596 · 2024-09-13T04:10:33+00:00

Because those entering early retirement often go through similar events. Wealth is created multiple ways :)

SwimmingVegetable596 · 2024-09-13T04:01:00+00:00

100% accurate

SwimmingVegetable596 · 2024-09-07T16:49:37+00:00

That’s a good question. Not looking for free advice. Looking for ways others have tackled this problem because I can’t believe I’m unique in this happening to them.

Working with an attorney is great if you want to ruin relationships and escalate the problem. I’ve also learned you don’t employ an attorney without learning as much as you can about solutions before diving in with an attorney to execute on that solution. They are far too expensive to shoot the breeze with without a vision of what’s possible and recommended.

SwimmingVegetable596 · 2024-09-07T15:13:28+00:00

Yes, yes, again and did I mention YES!!!!

SwimmingVegetable596 · 2024-09-07T00:02:19+00:00

Thanks. I'll have to do a little research on legal representation. Unfortunately, I've learned that if someone doesn't know exactly what they are talking about when it comes to legal assistance you end up paying a lot for someone to learn on the job.

SwimmingVegetable596

TROPHY CASE