”When a company’s value hinges on industry expertise and customer relationships, buyers increasingly seek greater future security.”
A growing number of SMEs are struggling to transition to the next generation. Increasing risks tied to company valuations are causing more sales to fall through. At the German Association of Management Consultants’ (BDU) 23rd German HR Consultants’ Day, experts explored the potential of the earnout model and shared insights on how to make it work effectively.
“This year alone, up to 230,000 medium-sized companies are expected to be put up for sale. Unfortunately, many are forced to close because the handover fails due to disagreements over the purchase price,” says Arne Adrian, Managing Director of the PAWLIK Group and board member of the BDU. Sellers often anticipate a high price for what they see as their life’s work. However, this expectation frequently falls short, as a life’s work holds value in hindsight, not necessarily in future potential. As Adrian explains, the earnout model is increasingly emerging as a viable solution to bridge this gap.
An earnout clause specifies that part of the purchase price is withheld at the time of acquisition and only paid later when the company meets specific performance targets. While the model has its roots in the startup world, it is increasingly being applied to other industries. However, the risks for buyers remain significant. “We’re seeing a lot of uncertainty around the future profitability of businesses, particularly when their success is closely tied to the founder,” explains Adrian. The earnout model addresses this issue by keeping founders involved with the company for an additional three to five years.
Recruitment consultancies benefit from earnout models
Recruitment consultancies are among the sectors feeling the pressure to secure successors. “The earnout model is particularly appealing to buyers of medium-sized recruitment consultancies, where success relies heavily on consultants’ client relationships and market expertise,” says Adrian. Keeping the existing management team in place temporarily also reduces the risk of losing top performers who may otherwise feel disconnected from the company during a transition.
To ensure the success of an earnout model, Adrian advises addressing potential conflicts between the existing and incoming leadership teams, as well as with employees. “Takeovers often fail because leaders fail to address the unique needs of employees,” he explains. Adrian, who has decades of experience in the field, offers five actionable tips for implementing a successful earnout model.
Five tips for making the earnout model a success
- Open communication: The first step is for the incoming and outgoing management teams to discuss their expectations and objectives openly. Ideally, these discussions should be documented to prevent misunderstandings and ensure alignment.
- Clear role allocation: Define who is responsible for what. Clearly assigning roles avoids conflicts of interest and power struggles. For instance, the new management might focus on acquiring new clients, while the outgoing team handles existing customer relationships.
- Shared strategy: Establish a joint vision for the years ahead. Both buyer and seller should collaborate on defining goals and strategies to ensure the earnout’s economic objectives are met.
- Team building: Merging two organizations requires uniting their teams into one. Regular interactions and team-building activities can help employees develop a shared corporate culture.
- Willingness to learn: Embrace the idea that both old and new management can learn from each other. Whether it’s sharing innovative sales strategies or improving approaches to managing mistakes, mutual learning creates a stronger foundation for success.
About PAWLIK Group
The PAWLIK Group is a European leader in the sustainable implementation of strategies, putting people at the heart of every initiative. The Group specializes in talent and organizational development, HR consulting, and digital transformation consulting. Founded in 1996 by Joachim Pawlik in Hamburg, the PAWLIK Group now operates with over 300 experienced consultants and employees across 15 international locations, offering global support for clients’ most pressing challenges. Committed to driving digital transformation, the PAWLIK Group continually expands its services through strategic ventures and investments in innovative service providers. Its consulting approach is integrative, systemic, and focused on delivering actionable results.
