When doing a rollup, it is often said that capital efficiency should come from financial engineering. So when Rachid Sefrioui started his 18 company rollup in IT Services and Offshoring, the name of the game was half-cash, half-earnout.The notion of an earnout is when you give the seller the other half of his price when the operating and financial goals are met in the subsequent 3 years. Of course what comes with that is that the seller has to stay in operations to achieve those objectives and get the rest of his payment.
And that is where problems arise...Indeed as a new acquirer you want to take over customer relationships, employee relationships and supplier/partner relationships. But the seller who is still running the company does not want to let go. Understandably. He feels the buyer has not paid up yet. But more realistically because he wants to keep those relationships as exclusive to him as possible so that when the buyer finishes paying, the seller can walk away with "his" customer relationships, "his" trusted employees, and "his" suppliers/partners.
This happens everytime because of the emotional structure of founders. They fundamentally believe that "The company is me".
Having lived through this scenario many times over, it becomes an art to smoothly accomplish the handover of these business-critical relationships to new managers the acquirer puts in place. If the handover is not smooth, or rather becomes a wrigling of those relationships, now winner comes out. The company ecosystem becomes polluted with hear-say, relationships are asked to choose "them vs. me", and eventually clans build up inside the company. This environment immediately affect company performance, and may take another 3 years to rebuild after a brutal separation with the founder and his cronies is consummated.
Smooth handover over time is the name of the game in rollups. Be patient. Take a few punches. Stomach a few bad apples. But in the end, it will make the acquisition price worth it, inside the initial 3 years of the earnout.
