The sale of a company in Germany is a complex legal process that requires thorough preparation and care measures. Therefore, it is essential for a successful sale to obtain precise and reliable information on the target company’s economic and legal situation in advance, as well as on the transfer process itself. This task requires a solid knowledge of all relevant German corporate law standards and the due diligence process.
At Schlun & Elseven Rechtsanwälte, we offer skilled and committed legal advice in this context. Our German corporate lawyers support you in every phase of the sales process and advise you on all issues relevant to German corporate, contract, and tax law. Based on a due diligence review, we provide you with a precise overview of the target company’s economic, legal, tax, and financial circumstances. Regardless of whether it concerns the non-disclosure or confidentiality agreement or the buyer’s letter of intent – our legal experts will ensure that your interests and rights are always protected.
From due diligence and contract negotiations to contract drafting and notarisation, we are there for you every step of the way.
Preparation of Company Sales
Each of the necessary steps should be meticulously prepared when selling a company in Germany. In addition to assessing the company’s value and considering a sales strategy, careful consideration should be given to what information about the company is passed on to potential buyers, as the public may draw conclusions about your company that could affect your sales negotiations. If false information is passed on, you may also be subject to subsequent claims for damages, which must be avoided. If there is a personal exchange between buyer and seller, concluding a non-disclosure agreement and a letter of intent is customary.
As a seller, you should have all legally relevant documents, contracts, liability issues and possible legal risks checked. Our experienced German corporate lawyers will be happy to assist you with the due diligence process. We will gain an overall view of your company by carefully analysing the product range, market-relevant circumstances, and internal management structures. Our lawyers will analyse past and present financial statements to prepare a reliable financial forecast for the company. The external view of the company makes it possible to work out unique selling points and thus formulate convincing reasons in favour of an investment. You should also start preparing for the due diligence at an early stage, especially as your shareholders will need to agree to such an audit unless your articles of association stipulate a different approach to due diligence.
Such sales preparation aims to determine the exact value of the company so that a letter of intent and, later, the purchase agreement can be drawn up based on this. A non-disclosure agreement should also be formulated before the contract negotiations so that it can be presented to the prospective buyers for signature before more detailed information is disclosed.
The Sales Process
In principle, the sales process can be divided into three further phases from the preparation stage onwards:
- Marketing phase
- Negotiation phase
- Contract or implementation phase
The first step in marketing your company is to create a teaser and an information memorandum. While the teaser should arouse interest in your company without revealing details, the information memorandum serves as a basis for information and preparation for the sales meeting.
Confidentiality is the top priority in the negotiation and contract phase. To ensure that the contents of discussions and sensitive information are not disclosed to competitors and other potential buyers, they are usually protected by a corresponding non-disclosure agreement (NDA). Such a protective measure is advisable because it is not yet certain whether the prospective buyer will purchase the company. In this context, it makes sense to agree on a contractual penalty that becomes due in the event of a breach of duty.
Even during the negotiations, the seller must disclose all company-relevant information. As the seller, you are subject to a special duty of disclosure and due diligence. If you violate this, you are generally liable to the buyer, with the consequence that you may be liable for damages. It is then no longer possible to exclude liability.
Throughout the process, it is crucial to monitor possible risks and minimise them in a timely manner. Our German M&A lawyers will provide you with comprehensive support in analysing risks and managing associated risks.
Important Documents for the Sale of a Company
- Teaser
- Investment Memorandum
- Letter of Intent | Term Sheet
- Non-Disclosure Agreement
- Actual purchase agreement
Tax Implications when Selling a Company in Germany
The tax implications should not be underestimated for the best possible handling of the company sale. The tax treatment in Germany varies depending on the type of sale – it is particularly relevant whether it is an asset or share deal and whether the seller and buyer are private individuals – for example sole traders – or companies. A business split is also taxed differently to a pure company takeover.
The fundamental difference between asset and share deals lies in the reference point of the object of the sale. A company is not a single legal position that could be sold. Accordingly, individual assets or business assets are transferred in an asset deal. The taxes here relate to each transferred asset. The share deal refers to the sale of shares in the company. The taxes here relate to the capital gain. Our lawyers explain the exact taxation conditions – what tax is due in what amount and under what circumstances.
Employees in the Event of a Company Sale
What happens to your employees when you sell the company? If it becomes known that the company is to be sold, all employees need to be aware of what will happen to their jobs. To prevent unnecessary legal disputes, it is advisable to consider the consequences for employees early enough and then communicate these sufficiently and with legal certainty.
You can also reach an agreement with the buyer regarding the employment relationships. An agreement is not required if a business transfer is provided for by law. This ensures, among other things, that all employment relationships are transferred to the buyer, Section 613a BGB. However, it is not easy to say when this is the case and requires a detailed examination of the sales process. When negotiating the sale, it should also be noted that the employees may have a right of objection and that the buyer can still dismiss the employees for specific (operational) reasons. Your employees should, therefore, also play a role in the sale considerations, as the handling of existing employment relationships will be relevant to the purchase price.
Purchase Agreement: Drafting and Analysis
Once the parties have agreed on the terms and conditions as well as the contents of the contract, our lawyers will ensure that it complies with German law and is legally binding. The exact provisions to be complied with in the conclusion of the agreement depend on whether it is an asset or a share deal. Since an asset deal only involves the transfer of individual assets or business assets, no specific form is usually required. In a share deal, on the other hand, the buyer acquires shares in the company/business. Therefore, notarial certification is needed here (Section 15 paragraph 4 of the German Acts on Limited Liability Companies, GmbHG). Our lawyers will review the company purchase agreement and ensure your interests are always considered when drafting it.
Due Diligence
Once the buyer has expressed a clear intention to buy through a letter of intent, they usually start the due diligence process on your company.
Our team will advise you on carrying out legal and financial due diligence to prepare you to start negotiations with the buyer. To ensure that the valuation of your business is as accurate as possible, our lawyers carry out the necessary analyses using standard market valuation procedures and methods. We ensure that the review of the company is carried out without any surprises from a legal, economic, and financial point of view. Should problems arise here, this can significantly slow down the purchase process. Therefore, it is crucial for a smooth process that your company is optimally prepared for the investigation.
During this examination, any information necessary for the sale is collected and forwarded to the buyer. The buyer can then analyse the information to get a clear picture of the potential risks and use this to decide on the purchase.
Legal & Financial Due Diligence
Our lawyers advise on legal and financial due diligence and intellectual property valuation in Germany. Our legal due diligence services include reviewing documents such as supply agreements, customer contracts, licences, leases, organisational documents, shareholders’ agreements, and company statutes. In essence, due diligence ensures the buyer understands all legal risks and potential liabilities associated with acquiring the business. The seller’s transparency is essential at this stage of the sale. In this way, the seller reduces their liability risk.
Financial due diligence involves assessing the company’s current economic situation. The value of intellectual property can drive up the price, especially if the company owns valuable trademarks, copyrights, and patents. Legal and financial reviews are essential for companies looking to innovate their models and brands further.
Our team provides environmental due diligence, focusing on reviewing current environmental reports and certifications.
Working with our German legal experts ensures that your company is organised, efficient, and adequately prepared for the due diligence process. Our lawyers will carefully follow the process to ensure that every material aspect is thoroughly documented and that your company is accurately assessed.
Intellectual Property Due Diligence
Moreover, our intellectual property lawyers are available to advise on IP rights and the transfer of valuable intangible assets. Our team will conduct a thorough IP due diligence process to identify and evaluate all IP assets owned or used by the company. This inventory includes trademarks, patents, copyrights, trade secrets, domain names, software, and any licenses or agreements related to IP. During this process, our lawyers will verify the IP assets’ ownership, validity, and enforceability, ensuring that the seller has the necessary rights to transfer them.
During the sale, our lawyers will assist our clients with clearly defining which IP assets will be transferred. This process can be done through specific sales agreement provisions or a separate IP assignment agreement. Within these agreements, we will seek to include requirements ensuring that all necessary documentation, registrations, and filings are completed to effectively transfer IP rights to the buyer.
As important as defining the assets is, stating the restrictions and limitations is also essential. Our team is ready to examine and review existing licenses, contracts, or agreements involving IP rights to determine any restrictions or limitations on transferring or assigning those rights. Such a process may include obtaining necessary consent or waivers from third parties if required. It also involves identifying any encumbrances on the IP assets, such as security interests or liens, and addressing their removal or satisfaction before the sale.
Furthermore, it can be considered to retain license agreements with the buyer. Under such an arrangement, the seller can seek certain rights to use the IP assets after the sale. The license should define the scope, duration, and associated royalties or fees.
During this process, it is essential to work with IP specialists and legal counsel experienced in IP matters to navigate the complexities of IP rights during a company sale. They can help ensure proper identification, valuation, transfer, and protection of IP assets and assist in drafting agreements that address the specific needs and concerns of the parties involved.
Dispute Resolution after the Sale of a Company
Even after the sale of the company has been finalised, legal difficulties can still arise. Although these can be minimised on both sides by professionally advising and representing each party from the outset, the risk of a post-M&A dispute cannot be completely ruled out.
There are many reasons for subsequent disputes. They may involve accusations of non-delivery of shares or non-compliance with guarantees. Disputes can arise over agreed purchase price adjustments and earn-outs if the company’s performance is assessed differently. Even if grievances occur in and around the company over time, allegations of a breach of the pre-contractual duty of disclosure and information can be made. It is also frequently argued that the purchase agreement is formally invalid. This must be carefully verified, as an invalidity of form can have considerable consequences.
In any case, our lawyers will comprehensively examine for you as the seller the basis on which the allegations were made and, on the other hand, categorise your allegations against the buyer in legal terms and assert your claims. As part of this, we will calculate the appropriate amount of damages and endeavour to reach an out-of-court settlement. In case of doubt, our German corporate law experts will represent you in court. However, due to the arbitration clauses in the company purchase agreement, disputes are predominantly settled before the arbitration court in Germany.
An Overview: Frequently asked Questions about M&A Transactions, Company Sales, and Company Acquisitions
M&A stands for mergers and acquisitions. Accordingly, an M&A transaction refers to the process in which companies merge, or one company acquires another. Overall, the term M&A is used for different types of company mergers and acquisitions. Even if the buyer of a company is not another company but an individual or a group of investors, the sale of the company is referred to as an M&A transaction.
A share deal involves the sale of company shares, while an asset deal involves the sale of individual assets or goods. The object of the sale is, therefore, the decisive difference. The choice of the form of sale has a significant impact on the entire transaction process, for example, on the form of the purchase agreement to be complied with and the tax assessment.
Due diligence includes assessing a company’s strengths and weaknesses, as well as its opportunities and risks. As part of this audit process, all economic, legal, tax, and financial circumstances are analysed and broken down.
The company value is, of course, the decisive factor in every M&A transaction. However, contrary to what one might think at first glance, this is not only determined by the profit. Decisive factors besides profit are:
- Profitability and earning capacity,
- turnover,
- amount of equity,
- fixed assets, inventories, and receivables,
- employment relationships,
- industry, location, and company size.
There is no generally applicable tax amount, and the types of tax incurred are not always the same. It always depends on the specific situation, in particular, the form of the company sale.
Efficient risk management in M&A includes
- careful preparation with professional support,
- comprehensive due diligence
- precise contract drafting,
- risk allocation,
- conclusion of appropriate insurance policies.
Practice Group: German Corporate Law
Practice Group:
German Corporate Law
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