Earnouts Signal Founder Dependence, According to M&A Expert Nick Bradley

In a recent LinkedIn post, Nick Bradley, an expert in mergers and acquisitions, delves into the often contentious topic of earnouts in business sales. Bradley argues that the presence of an earnout in a deal is a critical signal from private equity firms about their perception of the target business’s reliance on its founder.

Bradley highlights the common founder’s aversion to earnouts, stating:

“Most founders hate earnouts. And most founders deserve them.”

He explains that earnouts, which constitute a portion of the purchase price contingent on future performance targets, are typically seen by private equity (PE) as a way to mitigate risk. The PE perspective often includes phrases like “We’re de-risking the acquisition” and “Aligns incentives.” However, Bradley notes that founders often interpret these terms far more negatively, hearing:

“You don’t control your business anymore.”
“Targets are impossible.”
“We’ll hold your money hostage for 1-3 years.”

The Underlying Message of an Earnout

According to Nick Bradley, the fundamental reason behind an earnout proposal is a lack of complete trust from the buyer in the business’s ability to perform independently of its founder. He draws a clear distinction between businesses that command premium valuations and those that do not.

“Premium businesses? No earnouts. All cash at close,” Bradley writes. He elaborates that this is because PE firms can readily see that the established systems, capable team, and solid customer base are sufficient to meet projections without the continued direct involvement of the original founder. Conversely, Bradley suggests that a PE firm proposing an earnout is essentially signaling that the business is “founder-dependent, fragile, or unpredictable.”

Building an Investor-Grade Business

Bradley’s core advice for founders is to proactively build a business that is inherently robust and repeatable, thereby negating the need for earnouts altogether. The goal, as he frames it, is to create an “investor-grade” entity that PE firms are willing to acquire at full price without contingencies.

He poses a direct challenge to founders:

“Are you building a business PE trusts to pay full price upfront — or leaving millions on the table waiting for targets that may never be hit?”

Bradley encourages founders to assess their business’s readiness for a premium, all-cash offer. He offers a way for founders to evaluate their business against established standards, inviting them to DM him for a scoring based on “High Value Business Boardroom standards.”

The BOARDROOM Opportunity

For founders generating over $500,000 in revenue who are focused on building such an investor-grade business, Bradley also promotes his BOARDROOM initiative. He describes it as the “Private Equity Operating System” designed to help founders achieve specific, measurable outcomes.

Participating founders can expect to learn strategies for generating a consistent flow of qualified leads, enhancing profit margins, and freeing up significant amounts of personal time. Bradley emphasizes that this is the same strategic framework used by PE-backed companies for scaling, supported by a team of four specialists focused on key business areas: Pipeline, Process, Profit, and Strategy. He notes that there are limited “Founding Member spots” available for this program.