Question 1

What is an earn-out, and why do acquisitions use them?

Accepted Answer

A structure where **part of the purchase price is paid later, conditional on the business hitting agreed targets**. It exists to bridge a disagreement about value: the seller believes the business will perform, the buyer is not willing to pay for performance that has not happened yet.

**How it works.** An initial payment at completion, then further payments over a period — commonly one to three years — calculated against a metric such as revenue, gross profit or EBITDA, sometimes with thresholds, caps and sliding scales.

**Why both sides accept it:**

**It closes a valuation gap** that would otherwise kill the deal.

**It retains the seller**, who usually stays on and remains motivated — which matters enormously where the business depends on them.

**It transfers risk** to the party better placed to judge it.

**Why earn-outs generate so many disputes**, and they do so at a high rate:

**The buyer controls the business** during the earn-out period, and buyer decisions affect the metric. Reallocating costs, changing sales priorities, integrating systems, or investing for the longer term can all reduce short-term performance legitimately — and reduce the seller's payment.

**Accounting definitions.** Whose accounting policies apply, how group overheads are allocated, and how shared costs are treated can move the number substantially. **Revenue-based earn-outs have fewer arguments than profit-based ones**, for exactly this reason.

**The seller's authority.** A seller responsible for hitting a target but without the authority to run the business is in an impossible position.

**Conflicting incentives.** The seller is pushed toward short-term results at the expense of the business the buyer just bought.

**What a well-drafted earn-out contains:**

**A precisely defined metric**, with the accounting treatment specified.

**Protective covenants** obliging the buyer to run the business normally and not to act so as to reduce the earn-out.

**Information rights**, so the seller can see the figures.

**An acceleration clause** if the business is resold or the seller is dismissed without cause.

**An independent expert** to determine disputes quickly.

General information, not legal or financial advice.

Question 2

How do you buy an existing business, and what should you check?

Accepted Answer

Through a structured process — identify, value, offer subject to due diligence, investigate, negotiate, complete — and the investigation stage is where the real work is, because what you are buying

Question 3

What are the realistic exit options for a business?

Accepted Answer

Fewer and less glamorous than the coverage suggests. The overwhelming majority of successful exits are trade sales, and several perfectly good outcomes are not exits at all. Trade sale (acquisition).

Question 4

What are unit economics?

Accepted Answer

The revenue and costs attributable to a single unit — one customer, one order, one subscription — stripped of everything else. The question they answer is simple and brutal: does one of these make

Question 5

What is the difference between revenue, profit and cash flow?

Accepted Answer

They measure three different things, and a business can be strong on one while failing on another — which is why profitable companies go bust. Revenue (turnover). The total value of sales in a

Question 6

How does business-to-business selling actually work?

Accepted Answer

Through a long, multi-person process in which the decision is rarely made by the person you are talking to — which is why techniques borrowed from consumer selling fail so consistently. What makes it

Question 7

What is EBITDA, and why is it criticised?

Accepted Answer

Earnings before interest, tax, depreciation and amortisation. It strips four things out of profit to give a figure intended to show operating performance independent of financing and accounting

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