Valuation differences in the M&A process: How buyers and sellers find each other despite uncertainty

In the current market environment, the purchase price expectations of buyers and sellers are drifting noticeably apart. Many companies are faced with declining sales, planning uncertainty, and weak earnings. While sellers often view these developments as temporary, buyers are calculating more cautiously and considering potential risks in their valuations. This leads to transaction negotiations stalling or failing altogether. However, especially in cases of age-related or urgent succession planning, there is often no room to wait for better conditions.

To reach an agreement in such situations, flexible instruments that integrate both perspectives are needed. In practice, three structural elements have proven particularly effective: earn-outs, structured purchase price options, and reinvestments. They offer the opportunity to constructively bridge valuation differences, distribute risks fairly, and jointly shape economic success. They create the necessary bridge between current risks and future opportunities.

Earn-Outs: Purchase Price with Performance Component

Earn-out clauses link a portion of the purchase price to the company’s future development. This variable portion is typically around 15 percent of the total purchase price and is only paid out if previously defined targets, such as sales or EBITDA, are achieved within a specified period. This period typically lies between one and three years after closing.

It is important that the agreed key performance indicators are objectively measurable and as resistant to manipulation as possible. Payments are often staggered. A pro rata amount is due upon target achievement of approximately 85 percent, and the entire variable tranche is due upon full target achievement. For the model to work, the active involvement of the seller in the operational business during the earn-out period is crucial. Without clear responsibilities and transparency, conflicts of interest or disputes over the calculation basis are likely.

Practical example:
A medium-sized company in the automation technology sector is to be sold as part of a succession plan. Due to a currently weak order situation, the parties’ purchase price expectations diverge significantly. The solution: an earn-out model that reflects the expected economic recovery.

The buyer initially pays a fixed base purchase price of eight million euros. A further up to four million euros is committed as an earn-out. The payout is tied to achieving an EBITDA margin of 15 percent with revenue of 16 million euros in the first full fiscal year after closing.

If this target is fully met or exceeded, the seller receives the full variable tranche. If the target is between 85 and 95 percent achieved, the amount is paid out pro rata on a straight-line basis. If the target is underachieved by more than 15 percent, the earn-out is completely waived.

The chosen structure creates a fair balance of interests. The buyer reduces its risk in an uncertain market environment, while the seller retains the opportunity to realize the full value of the company – provided its expectations are confirmed.

Purchase Price Options: Valuation Upon Exercise

Purchase price options such as call and put rights create flexibility in the transfer of shares and make it possible to link the final price to the company’s actual performance. In contrast to a fully fixed purchase price, the valuation at the time of option exercise is based on objective criteria – often an EBITDA multiple based on an average of the previous fiscal years. This makes actual economic success the basis for pricing.

This model has proven particularly successful in multi-stage investments or the acquisition of minority stakes. The buyer ensures greater planning security by making full participation dependent on future performance. At the same time, the seller retains a stake and can participate in any potential increase in value. A prerequisite is a transparent, contractually agreed valuation mechanism that offers reliability to both parties and minimizes potential conflicts.

Put/call option based on a practical example:

An investor acquires 70 percent of the shares in an industrial service provider at a valuation of eight million euros. The remaining 30 percent remains with the seller. An option window takes effect in the second year after closing. The buyer receives a call option, the seller a put option.

The valuation is based on a fixed EBITDA multiple. If the transaction is successful, the buyer can acquire the remaining shares pro rata in the second year for EUR 11 million. If the option is not exercised, the seller can sell in the fourth year at the then higher value of EUR 13 million. Both parties benefit from a performance-based, predictable structure.

Reinvestments: A Signal of Trust with Leverage

With a reinvestment, the seller retains a minority stake in the company. This model has proven particularly successful in succession planning and private equity transactions. Reinvestment signals confidence and creates a commonality of interests between the existing shareholder and the buyer.

The advantage lies in the combination of continuity and incentive: The buyer benefits from the know-how and experience of the previous owner, while the buyer can participate in the further increase in value. This model is successful when governance rules, co-sale rights, and tax frameworks are clearly structured. The goal is a joint exit after several years, in which both parties achieve economic benefits.

Practical Example:

A private equity investor acquires 80 percent of the shares in an industrial surface technology company. The remaining 20 percent remains with the seller, who continues to serve as managing director and helps shape the growth strategy.

A planned exit is planned after five years. During this time, the company’s value increases from ten to 22 million euros. The seller benefits proportionally from the increase in value through his reinvestment and realizes an attractive tranche from the second sale. The structure combines trust, operational continuity, and economic prospects.

Conclusion

Valuation differences are not an obstacle, but rather an incentive for structuring. Earn-outs, purchase price options, and reinvestments offer proven mechanisms for addressing differing expectations and successfully implementing transactions even in a volatile market environment. The key is to tailor the arrangement to the company’s context, its ownership structure, and the buyer’s strategic interests. Those who know the right tools and use them appropriately can achieve viable agreements even under difficult conditions.