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In the course of a corporate transaction, the question often arises as to the seller’s future role after he or she has stepped down from management. In many cases, parties tend to opt for a consulting agreement to reflect mutual interests, as this arrangement is designed to serve a specific objective or last for a certain period of time. For the seller, such an agreement can provide additional compensation as part of the transaction, or serve to maintain influence and secure a future payment (earn-out).
In this case, the seller’s role shifts from that of an executive to that of a consultant—with a clear handover of responsibility to the new management team, for whom he will then work.
It is important to note at the outset that well-managed German family-owned businesses and SMEs—even those with revenue as low as 5 million EUR or an operating profit (before taxes and interest) of 750 TEUR—already attract significant interest from relevant investors across regional boundaries. Strategic investors from the industry or complementary business sectors, private equity firms, and family offices are the most common groups of interested parties.
Therefore, various provisions must be individually agreed upon in a corresponding consulting agreement; these are listed here as examples for consideration:
Term: The duration should be long enough to ensure the transfer of knowledge and the transition phase, but also flexible enough to remain adaptable—which brings us to the issue of termination rights. Under what conditions and with what notice period can the agreement be terminated early? The interests of both the buyer and the seller should be taken into account.
Depending on the structure of the actual business purchase agreement, the fee must also be defined. This may include a fixed fee, hourly billing, or performance-based payments. Additional services, such as the right to reimbursement of out-of-pocket expenses, travel costs, or other expenses, should be clearly stipulated in the contract.
It must be clearly defined how much time the consultant must be available. This can be specified in hours per week or month, or the scope of the consulting services should detail the tasks and responsibilities of the seller acting as a consultant. The nature of the consulting services as well as the results to be delivered must be specified.
The provisions of the business purchase agreement regarding confidentiality and non-compete obligations should also be incorporated into the consulting agreement to ensure that the consultant remains bound by confidentiality obligations. Likewise, to protect the company, a non-compete clause must be agreed upon to prevent the consultant from working for competing companies concurrently or shortly thereafter, or from disclosing trade secrets.
The consulting agreement must ensure compliance with all applicable laws and regulations , particularly with regard to labor law, tax law, and competition law. The extent to which the consultant can be held liable if they fail to fulfill their obligations or make errors should also be clearly defined. If necessary, appropriate insurance should be considered.
Since the objective of the consulting agreement is clearly defined, the results should also be reviewed regularly. KPIs (Key Performance Indicators) can be useful for measuring interim results, and feedback loops should be established to ensure that the consultant meets the requirements.
A crucial yet often neglected point is the documentation and handover of the consulting results. The knowledge must be documented in a structured manner to ensure that it remains within the company after the consulting contract ends. Likewise, the handover process to internal teams or other consultants must be regulated to ensure continuity after the contract ends.
For the buyer, the following points also play an important role:
The seller should remain available for a certain period after the transaction is completed to ensure a smooth transition. This is particularly important if the seller played a key role in the company and their knowledge and relationships are of great importance to the ongoing business; this is relevant for continuity and the handover.
In addition, the seller often possesses specific (industry) knowledge that is valuable to the buyer, particularly with regard to customer relationships, business processes, or technical expertise. Through an appropriate consulting agreement, the buyer can ensure that this knowledge is effectively transferred, thereby facilitating the transfer of know-how at all levels.
The seller’s continued involvement can strengthen the trust of employees, customers, and other stakeholders.
An appropriate consulting agreement can also help avoid potential conflicts of interest, particularly if the seller wishes to remain active in the market after the transaction. The agreement may include specific restrictions that go beyond those in the purchase agreement to ensure that the seller does not engage in competing activities.
Overall, a seller’s advisory agreement in an M&A transaction helps ensure the success of the integration, fill knowledge gaps, and strengthen the trust of the parties involved.
By taking these points into account, the advisory agreement can be optimally structured to ensure the success of the M&A transaction and the subsequent integration of the company.
