Case Study #2: What to Be Aware of in an Earnout

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Jason Swenk In 2012 Jason Swenk sold his digital advertising agency, Solar Velocity.

Solar velocity helped with websites and web applications for brands like Aflac, Coke, and LegalZoom. At the time, he took 50% of the sale in upfront cash and took the remainder in a 50% earnout.

What is an earnout?

An earnout is another way for a seller of a business to receive payment that is based on future performance of that sold business.

Why do some buyers offer them?

Sometimes they lack the cash or capital to buy the business for the entirety of the selling price, so asking the seller to, in a way, finance the deal through an earnout is a strategy. Many times there may be some skepticism as to the viability of the firm without the seller in position, the business may have customer concentration issues, or are using aggressive projections, so this helps “steady the ship” during the transition time as the seller is incentivized to do what he can to make his earnout provisions.

Why did Jason decide to sell the business in the first place?

It had been 12 years in the making, and at the $10M revenue milestone, he knew that the next level for the business would be $50M, and he didn’t have the desire to push on to that level. He wanted to do something new.

What were the terms of his earnout?

He had to stay on for two years and the company needed to hit certain markers throughout that time.

What went wrong?

The company that acquired Jason’s company was itself acquired nine months after Jason sold. The new company then construed the earnout timelines across those 9 months instead of the 24 in the original agreement, and he didn’t get any of the earnout.

The major failure here was from Jason’s lawyer and M&A firm that didn’t foresee the possibility of another acquisition and how the terms of the earnout would survive in such a transaction. That’s why it is so critical not only to get help in structuring your deal, but to think about every possibility, particularly in an earnout.

Before that, however, you must realize that when you’re bought, you no longer control the reins of leadership in the company, and when you make suggestions which will improve the likelihood of your targets being hit, those suggestions may be disregarded. Even if you have yourself covered on the contract side, you can’t control how management will work with you.

So if you have to do an earnout, what should you consider?

Given this experience, it’s not hard to imagine that Jason’s policy is “no more earnouts” should he sell a business in the future. But what if an earnout is part of a deal you are involved in?  You should realize that the best earnouts provide incentives for the buyer, not just the seller.  If you can make it equally beneficial for a buyer to hit an earnout marker, they may stay on the front lines with the seller to make sure those targets get hit.

And, as we noted above, make sure that you account for every circumstance during the earnout, including an acquisition of your acquirer.

Words of Wisdom

Jason’s gone on to bigger and better things since the sale, including authoring a book and creating a smartphone app, so this case study isn’t solely a cautionary tale.  “Build to sell, but treat your business like you never will” and “The grass is greener…on the side you water!” are quotes that indicate that Jason is the sort of person who learns from his mistakes. We hope you will learn his lesson, so you don’t have to re-learn it on your own.

To learn more about Jason, Solar Velocity, and this sale, click here.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303.

Extreme Ownership: Apply This Technique Today To Improve Your Business

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The concept of “Extreme Ownership” was coined by former Navy SEAL Jocko Willink. Jocko spent 20 years in the SEALs and retired in 2010 after serving as the commander of a SEAL Task Unit in Iraq.

Origin of the term

During an operation in which he was the commander, there was a friendly fire incident which resulted in the death of a member of the Iraqi military at the hands of one of his own SEALs.

The operation was immediately shut down and everyone came back to base. As Jocko spoke to different troops in order to get a bird’s eye view of what had happened moment by moment, he realized that it hadn’t been one particular thing that had gone wrong, but rather a number of things.  Troops had gone to the right locations at the wrong times, or gone to the wrong locations at the right times, for example.

With less than 20 minutes to go before the briefing, Jocko realized the answer: he was the single point of failure. He was the commander of the operation and if anything bad had happened, it was down to him. What he would later go on to call Extreme Ownership was realized, and he defines it as:

“An attitude of not ever making excuses or blaming others. When problems arise you take ownership and solve them.”

Jocko WillinkApplication in your Business

What Jocko experienced when he implemented this strategy in his life can have significant benefits for your business, not just because it’s unexpected, but because it causes your colleagues and staff to pause and think.

When something goes wrong with a marketing campaign, or a customer service issue, or a product launch, instead of pointing the finger at a subordinate and letting the righteous anger flow, you can say, “It was my fault.”

What you’ll find is that your staff will more than willingly refuse to allow you to take all the blame yourself, and then willingly identify ways that they could have improved.

When you create a culture in which those at the very top are willing to take the blame for mistakes, you allow and encourage your staff to strive not to make those mistakes again. The entire company can be oriented towards positive resolutions of poor outcomes, rather than playing the old blame game, which has never been listed as a business principle to be lauded.

President Truman famously had a “The Buck Stops Here” sign on his desk.  Extreme Ownership allows you to fold a tangible daily practice of that saying into your business.

Jocko Willink is on Twitter.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at  or 913-433-2303.

3 Reasons You Won’t Be Able To Sell Your Business

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There are many reasons why you might not be able to sell your business, but today we want to focus on three in particular. Think of them as the ghosts of business past, present, and future.

1.The Ghost of Business Past: You have a lopsided company

Now, many businesses started with “that one client” which may have carried them through those long and lonely nights at the beginning, but for a business to truly become something other than an owned job, it needs to have a diverse client portfolio, revenue-wise.

If your business is lopsided it’s unattractive to buyers because they will naturally and obviously ask, “Well, what happens to this business if your major client goes out of business, gets acquired, or goes into crisis?”

Since you’re not in charge of your client’s business, you probably don’t know how or when any of these eventualities could occur, but more importantly, you probably don’t have an exciting answer which replaces all that revenue.

ghosts2.The Ghost of Business Present: You have no recurring revenue

While not every business will work on a subscription model, it’s definitely a trend in multiple industries to pivot to create more steady and dependable revenue streams.

While some of these pivots might be obvious, like flower companies offering a monthly subscription for both personal and corporate clients, the unexpected one that got large scale adoption was Amazon Prime: an annual recurring fee that actually led customers to buy more from the mega-giant.

If you want to learn more about this trend (and get some ideas for your business) you should read John Warrilow’s The Automatic Customer.

3.The Ghost of Business Future: The company can’t make it without you

How often are you on vacation, and how long can those vacations be?  The best answers are, “Often,” and “however long I want,” but obviously preferences are different for each business owner. The wrong answers are definitely, “Never,” and “not more than a few days.”

This indicates a strong dependence upon you – whether it’s because you are the secret sauce in the sales cycle, because you are the only manager who can keep your team on task, or because you are simply too involved in day-to-day operations to be gone for any amount of time.

This screams “owned job” to a potential buyer and if that buyer loves your industry and wants to get involved right away, that might be a great play for them, but nine times out of ten they’re going to see this situation as a giant red flag, that an owner hasn’t created systems to make the company survivable without his/her daily blood, sweat, and tears.

Remember that Scrooge was able to send away the ghosts at the end of A Christmas Carol by promising to amend his life. Take a look at your own business to see if any of these ghosts are hanging about.

And then get rid of them.

Apex is actively looking for Advisors to join our team. If you or someone you know would like to learn more, contact Doug Hubler at or 913-433-2303

Business Sale Book Club #1: Beyond the E-Myth, by Michael Gerber

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Business Sale Book Club is a new series here at the APEX blog.  We review books you should read in preparation to buy or sell a business, as well as how to build a company to sell one day.  The first one in our series comes from the man who popularized the term, “Work on your business, not in your business.”

e-myth-revisitedAbout the Author

Michael Gerber is renowned for helping small and medium-sized businesses and their owners develop from an “owned job” to an “owned business.”  He’s been doing it for over 40 years and has worked with over 100,000 clients.

So, what’s the E-Myth?

Michael’s first book, The E-Myth Revisited, explained the roles of Technician, Manager, and Entrepreneur.  The technician is in charge of producing the main product or service of the business.  If you own a pie shop, this would be the person who bakes the pies.

Manager is self-explanatory.  The Entrepreneur is the visionary and the person who holds the business together and takes it to the next level.  The E-Myth, in part, is about creating a balance between these three roles.

What’s the new book about?

Michael saw that many of his clients hadn’t, despite his advice and admonitions, built a company as a product for sale.  Michael saw that many firms were still “Companies of One,” meaning if the owner left, the company would eventually fold.

Michael wants to shift people away from rebuilding or tweaking their current businesses to building it right starting from the beginning.  He doesn’t literally mean close the business and start over, but rather, begin at the beginning so that by the time you’ve done all the documentation and work, you’ll have a product for sale at a time of your choosing: your business.

Why should we read it?

Firstly, because it’s only 113 pages and it’s by a mastermind in the small business space.  Michael focuses on the business owner and subdivides him/her into Dreamer (dreams), Thinker (creates a vision), Storyteller (has a purpose), and Leader (has a mission).

Again, each owner is going to have a bit of each of these roles within him/herself.  But by shifting your attention to how you execute these roles you will transform your role in the business and hence transform your business.

Building a business is a lot of sweat and hard work.  But a fair bit of it is learning as well.  If you need book recommendations on building, buying, or selling, we have plenty to give you.  Just ask!