The Silver Tsunami: Issue No. 006

Welcome to The Silver Tsunami. This week: what happens when a seller leaves real money riding on decisions made after closing. A billion-dollar deal, the data behind earnouts, and a Delaware decision worth understanding. Let's get into it.

In March 2025, PepsiCo agreed to buy Poppi, the prebiotic soda brand Allison and Stephen Ellsworth started in their kitchen, for $1.95 billion. On top of that, PepsiCo agreed to pay an additional $300 million if the brand met undisclosed growth targets by the third quarter of 2027.

This month, a footnote in PepsiCo's latest quarterly filing put the fair value of that earnout at about $12 million. It was about $200 million when the deal closed in May 2025, rose to $278 million by December, then fell to $117 million in June. Kevin's post about it drew more than 2 million views.

What the $12 million does and does not mean. It is not a payment decision. It is PepsiCo's accounting estimate of what the earnout is worth today, a probability-weighted, discounted figure built on its forecasts. The actual payment is governed by the contract and its milestones, and the estimate can change before the measurement period ends in 2027. One more distinction: the $1.95 billion price already included $300 million of expected tax benefits, for a net price of $1.65 billion. The earnout is a separate, second $300 million.

The accounting wrinkle. When PepsiCo lowers the estimated value of an earnout liability, the adjustment increases its reported earnings, all else equal. Its quarterly filing attributes acquisition-related income in its North American beverage unit primarily to the change in the Poppi contingent consideration, and the estimate fell by about $105 million in the latest quarter alone. That is an accounting result, not a cash payment, and not evidence that PepsiCo interfered with anything. But it shows how different the buyer's reported numbers can look from the seller's remaining opportunity.

The other side. A PepsiCo spokesperson said Poppi grew sales volume by double digits last quarter and gained market share, and its CEO has said Poppi is one of the brands PepsiCo plans to invest more in, according to Bloomberg reporting. The earnout targets were never disclosed. So both things can be true at once: the brand is growing, and it is still not on track for the payout. That gap is the whole story. The contract decides what counts.

The base rate. SRS Acquiom reports that 24 percent of private-target deals outside life sciences in 2025 included an earnout, up from 19 percent in 2014. Its separate payout research, covering about 100 deals with earnouts that closed from 2021 onward, found that 59 percent had paid sellers at least something, and that sellers had received about 21 percent of the maximum earnout dollars available as of the reporting date. Smaller deals showed weaker results. That is a warning, not a forecast for any particular deal: the sample is limited, and earnout terms, industry, and the length of the measurement period all matter.

Why sellers keep agreeing to them. Because some valuation disagreements are real. The seller believes the business is worth more than the buyer will pay today, and the earnout lets both sides stop arguing and let the future decide. In small business deals we see them most when a seller's last year was unusually strong, when a big new customer has not proven itself yet, or when the buyer's lender will not finance the seller's number. Earnouts can bridge those gaps, but they do not eliminate risk. They move part of the price into the future, when one party controls much more of the outcome than the other.

Where we land. If the deal does not work financially without the earnout, the earnout is not solving the problem. It is postponing it. Kevin has negotiated a lot of these, and his protections are below.

Kevin, in his own words, from his post this week.

"An earnout is a future bet on a business you no longer control. After closing, the buyer sets budget, pricing, hiring, marketing, etc. Every lever behind whether or not you get your earnout belongs to someone else."

"How you define 'revenue', 'EBITDA' or any other measurement metric used to determine the earnout is what ultimately drives the payout. So things like how corporate overhead gets allocated or what happens when the Seller's product is folded into a larger brand with competing products becomes unbelievably important."

"If you agree to an earnout, protect it at all costs!"

•  "Tie it to metrics like revenue, which are subject to less manipulation than metrics like Adjusted EBITDA."

•  "Include strict operating covenants around things like required budget, sales support, and no diverting customers to other products or business lines."

•  "Push for audit rights and a dispute mechanism."

•  "Demand acceleration of the earnout if the buyer or product line is sold, merged, shut down, or deprioritized."

•  "Keep the measurement period short! The longer the period, the more opportunity it gives a Buyer to game the system."

"To be transparent, I don't have any background into what happened here. I have no idea if the earnout was poorly structured or if PepsiCo acted in a way to purposely reduce the earnout. That's not the point of this post."

"My advice to every seller I represent who is considering agreeing to an earnout is simple: Value the deal based on cash at close and treat the earnout as a bonus. If you get it, great. But don't count on it!"

Read Kevin's full post.

One provision a week, from people who draft them for a living.

This week: the efforts covenant that protects an earnout.

Kevin's list tells you what to ask for. Here is the clause that does the most work, and the case that proved it has teeth. The illustrative language below is ours, not a quotation from the J&J agreement:

"Buyer shall use commercially reasonable efforts, consistent with the efforts Buyer uses for its own products of similar priority, to achieve the Milestones, and shall not take any action with the intent of avoiding or reducing any Earnout Payment."

In 2019, Johnson & Johnson bought Auris Health, a surgical robotics company, for $3.4 billion up front plus up to $2.35 billion in earnouts. The merger agreement required J&J to pursue the milestones with commercially reasonable efforts measured against how it treated its own priority medical devices, and barred it from acting with the intent to avoid the earnouts. The milestones were not met, and Auris's former stockholders sued. After a 10-day trial, the Delaware Court of Chancery entered a judgment exceeding $1 billion. In January 2026, the Delaware Supreme Court affirmed key findings that J&J breached its efforts obligations and fraudulently induced Auris to accept a particular $100 million contingent payment. But it reversed roughly $300 million tied to a milestone that required a specific FDA approval pathway, because the contract expressly allocated that regulatory risk to the sellers and the court would not rewrite the bargain.

The lesson is two-sided. The efforts provision had teeth because it named a measurable benchmark: how J&J treated its own priority devices. But the sellers also lost a significant milestone because the contract specified an approval pathway without protecting them if that pathway changed. Courts enforce the promises the parties actually made. They do not supply the protections the parties wish they had negotiated.

What it means for a small business sale. The drafting lesson works in smaller deals, too. Establish measurable operating obligations, protect against changes in accounting methods and customer allocations, and specify what happens if the buyer sells, combines, or shuts down the business. A buyer may reasonably resist restrictions that limit how it can operate after closing. That is a negotiation over risk, not evidence of bad faith. The time to settle it is before the seller gives up control.

Same question to Grok, ChatGPT, and Claude: If you're selling your business, should you agree to an earnout? One word, then three sentences. Answers are verbatim.

GROK: NO. "Earnouts hand the buyer operational and accounting control over the very metrics that determine whether you get paid, so the risk of underperformance is almost entirely yours after closing. Measurement disputes, expense allocations, and strategic decisions that suppress short-term results are common and costly to fight, frequently leaving sellers with a fraction of the contingent amount or nothing. Unless the definition, measurement period, audit rights, and anti-manipulation protections are airtight and the alternative is no deal at all, pure cash or a simple seller note is almost always better."

CHATGPT: NO. "An earnout means you're selling your business today but betting on someone else's ability to run it tomorrow. The buyer controls the employees, expenses, strategy, and decisions that determine whether you ever get paid. Unless the earnout is genuinely additional upside, with objective metrics and strong contractual protections, take less guaranteed cash and walk away."

CLAUDE: NO. "Across private deals with earnouts, sellers have historically collected roughly one in five potential earnout dollars, and the buyer controls most of what decides the payout. An earnout can still make sense to bridge a real disagreement about value, but only as upside on top of a cash price you would accept on its own. If the deal only works for you when the earnout pays in full, it is not the deal you think it is."

Three models, three NOs. But none said an earnout could never work. All three focused on the same practical question: is the seller accepting a price that only makes sense if a future payment arrives? The models do not decide that question. The economics and the contract do.

Katie Zacharia was named White House press secretary on October 9. A week later, the Associated Press reported she was leaving the job, after a short tenure dominated by questions about her description of herself as a lawyer. Zacharia graduated from Pepperdine's law school in 2011. The State Bar of California said it had no record of her being licensed there, and she appeared to confirm that she took the California bar exam, did not pass, and did not retake it. Her position: she has a law degree and legal experience, including work at a law firm in China, and was told she could call herself a lawyer while providing "legal analysis, not legal advice." She and the president have both said she was hired as a spokesperson, not as a government lawyer. Two groups have filed complaints asking the State Bar to investigate. Nothing has been decided.

The lore. In everyday speech, "lawyer" and "attorney" are used interchangeably, and a law degree alone does not make someone licensed to practice. Licensure is what allows a person to give legal advice to clients. California's Business and Professions Code makes it a misdemeanor for someone who is not an active licensee to hold themselves out as practicing or entitled to practice law. Whether any particular statement crosses that line depends on the facts and context, which is exactly what the complaints ask the State Bar to evaluate. It has not said whether it will act.

Why it matters to you. In a deal, you will be handed advice from people with all kinds of titles: brokers, consultants, "deal attorneys," general counsel. Before you rely on anyone's legal advice, look them up. Every state bar has a free online lookup, and it takes about thirty seconds.

Seth Goldman, who sold a beloved challenger brand to a beverage giant and then watched the giant turn off the lights.

Goldman co-founded Honest Tea in 1998 with Barry Nalebuff, his former Yale business school professor, around a simple idea: bottled tea that was organic and only lightly sweetened. Coca-Cola bought 40 percent of the company in 2008 and the rest in 2011. Goldman stayed on to run it inside Coke.

On May 23, 2022, Coca-Cola announced it would discontinue Honest Tea by the end of the year, following a broader effort to cut the number of brands in its portfolio. Goldman called it a gut punch.

Here is the part that matters for anyone selling. Goldman could not simply bring Honest Tea back, because Coke still owned the name and kept using it for its Honest Kids juice line. The brand he built was no longer his to save. So he started over: with Nalebuff and chef Spike Mendelsohn, he launched Just Ice Tea, and sold the first bottle on September 6, 2022, while Honest Tea was still on some shelves.

Here is the lesson for sellers. Selling a business often means selling not just its revenue, but the brand, the intellectual property, and the right to decide its future. Goldman could build a new tea company, but he could not reclaim the brand Coca-Cola owned. If preserving a name, a product, an employee relationship, or an operating principle matters to you after closing, negotiate that protection before you sign. Once control changes hands, sentiment is not a contractual right.

Poppi and Honest Tea are different stories with the same lesson. The price you negotiate matters. So do the rights you give up to receive it.

Want more of this? Main Street Deals is our weekly podcast with our partner Sam Rosati, where we break down how small business deals actually get done.

This week: Franchise M&A Explained. We use Crumbl's numbers to unpack franchise economics: why average revenue per store fell from $1.84 million to $1.14 million in three years, how to read a Franchise Disclosure Document, and what a franchisor's control over suppliers, fees, and exits means for your returns.

Pairs with this issue: What does "market" actually mean? Why deal terms like escrows look completely different on Main Street than in the middle market, and how to push back when the other side says "that's market."

Follow Main Street Deals on Apple Podcasts, or search "Main Street Deals" wherever you listen.

See you next Thursday.

Eric and Kevin