5 Tips on How to Make the Earn-Out Model Work When Selling SMEs

“If the company’s value hinges on industry expertise and customer access, acquirers are looking for more future security” Many SMEs are in danger of not making the leap to the next generation. More and more often, the sale fails due to the currently increasing risks of company valuations. At the BDU’s 23rd German HR Consultant Day, experts discussed the earn-out model and its chances of success.

“This year alone, up to 230,000 medium-sized companies are up for sale. Many have to give up their business because the handover fails due to a lack of an appropriate purchase price,” says Arne Adrian, Managing Director of the PAWLIK Group and Chairman of the Personnel Association in the Federal Association of German Management Consultants (BDU). The seller side expects a good price for their life’s work. In reality, this idea often fails because a life’s work is only relevant in retrospect and not in outlook. The earn-out model is therefore increasingly proving to be a solution, Adrian explains.

An earn-out clause stipulates that a part of the purchase price is not to be paid when the shares are acquired, but only later, when the company has achieved certain goals. Earn-out is actually a successful model from the start-up scene. But the risks for buyers are similar. “We are experiencing a lot of uncertainty about the future earning power of companies. This is especially true when success is closely linked to the founder,” explains Arne Adrian. With the earn-out model, founders stay with the company for another three to five years, which avoids the problem.

Personnel Consultancies Profit from Earn Out

Many recruitment consultancies are also currently feeling the pressure to find successors. “Earn Out is interesting for buyers of medium-sized recruitment consultancies because the success of the company depends on the consultants with their client contacts and their market knowledge,” says Arne Adrian. By retaining the old management for the time being, the risk of top performers quitting because they no longer feel connected to the company is reduced, the 55-year-old explains.

In order for the earn-out model to succeed, Arne Adrian recommends counteracting possible conflicts between the old and new management or staff. “Takeovers often fail because of the managers’ inability to respond to the individual needs of the employees,” the Berliner clarifies and gives five tips for the successful implementation of the earn-out model.

5 Tips on How to Make the Earn-Out Model a Success

  1. Communication: First, the new and the old management should talk openly about their mutual expectations and the objective. Ideally, the results should be recorded in writing so that there are no misunderstandings.
  2. Clear distribution of roles: Who does what? In order to avoid conflicts of interest and competence, roles must be clearly defined. For example, it can be decided that the new management will take care of new customer business, while the old management will look after regular customers.
  3. Joint strategy: What is to be achieved in the next few years? For these questions, buyer:in and seller:in should define a joint approach. This makes it easier to achieve the economic goals of the earn-out.
  4. Team building: In order to bring two companies together successfully, two “teams” must become one. Regular exchanges or team-building events ensure that the employees develop a common corporate culture.
  5. Willingness to learn: just because something is new, it is not automatically bad. Old and new management can learn from each other, for example in terms of sales ideas or error culture.

About the PAWLIK Group

The PAWLIK Group is a leading company in Europe when it comes to the sustainable implementation of strategies. We put people at the center of all measures. The group offers personnel and organizational development, personnel consulting, and digital consulting. The company was founded in 1996 by Joachim Pawlik in Hamburg, Germany. With over 300 experienced consultants and employees at 15 international locations, PAWLIK Group supports clients worldwide with their challenges. The PAWLIK Group is constantly expanding its range of services for digital change through ventures and investments in innovative service providers. The consulting approach is integrative, systemic, and focused on implementation.

Press Contact

PAWLIK Consultants GmbH
Kristina Behrend
Astraturm • Zirkusweg 2
D-20359 Hamburg
T +49 (0)40 / 53 28 50 13
E presse@pawlik.de

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