The 275 million negotiation mistake

It’s no secret I have a massive collection of motorcycles. This one has gone up in value 3X. I def bought it “right.” There’s a Private Equity lesson wrapped up in this little piece of history and I’m happy to drop it on you below the picture.

This part of my collection is NOT for sale. In fact, I’ll be buried with this motorcycle.

But picture this. You’ve got your own motorcycle in the driveway, listed for $20,000. A guy comes over Saturday morning, walks around it twice, and says, “I can do eighteen.”

You say, “Meet me at nineteen and it’s yours.”

Handshake. Deal done.

Thirty seconds ago, this was a stranger in your driveway. Now you’ve taken a thousand dollars off your price because he walked around your motorcycle twice. Apparently those were two very expensive laps.

As bad as this negotiation went down, Private Equity deals can go much worse.

Ryan Reynolds sold his gin company for $610 million. That’s what the headlines said. But that’s not the real deal.

Ryan didn’t own the whole company. He bought a piece of Aviation Gin in 2018, and he had partners. When the company sold, the money was split among all of them.

The price wasn’t really $610 million either. It was “up to” $610 million. Those two words matter a lot.

Ryan and the other sellers got $335 million on the day the deal closed. The other $275 million comes later; maybe NEVER. IF the new owners is hitting its sales goals for the next ten years, it gets paid. If sales fall short, that money never gets paid.

This is called an earn-out. You get part of the price now, and you have to earn the rest.

In my experience, earn-outs never get fully paid.

Why would the buyer, Diageo, set it up this way?

It’s obvious: People bought the gin product because of Ryan’s endorsement. If Diageo paid the full price up front, Ryan walks away, they’d own a gin nobody cares about.

So they paid about half now and tied the rest to sales. Ryan kept a piece of the company and stayed on as the face of the brand.

The best person to sell Ryan Reynolds’ gin was still Ryan Reynolds. Diageo knew that, and they built the deal to keep him selling.

The takeaway? Almost every deal you hear about has complex earn out structure behind it that you never see.

Private Equity isn’t what you think it is. The formula is not “invest, grow, sell.”

Instead, invest, own 30% of the deal going in. And get 50% of the profits going out.

It’s ALL about structure.

On Thursday, November 19, I’m opening the Private Deal Blackbook live.

I’ll take apart a private equity payday from both sides of the table. How much cash did the buyer put up? How much did the founder take home? And who gets to make the decisions that determine whether the rest ever shows up?

Next time you get into a deal negotiation, you’ll be glad I taught you the FIVE STRUCTURES that control every deal.

Oren