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Guidelines to Selling a Business

Succession of a company and its business can develop into a pressing problem if a family-internal takeover or passing on the company to qualified employees is ruled out as an "internal solution". If no suitable candidates are in sight, the problem is delayed - often with disastrous financial consequences. From the acquirer's point of view, usually only the future market and profit opportunities are relevant. At the latest when negative business developments become apparent, the company succession should be settled promptly at acceptable conditions.

Quite understandably, the intentions to sell are not communicated internally or externally in the initial phase. This is because any leaking of plans to sell without an already regulated succession can lead to the unsettled staff looking elsewhere. On the other hand, experience shows that competitors will try to use the intention to sell for their own purposes. It is therefore advisable to confide in a reliable third party - tax advisor, lawyer, banker, business broker - who will sound out potential interested parties under the "cloak of anonymity". Potential buyers can be found at the same economic level, but also among suppliers or customers. An advertisement in the relevant online forums can also attract potential interested parties.

Once the veil of anonymity has finally been lifted and both parties have the impression that an agreement could be concluded, the key points of the intended transaction are first outlined and fixed in a so-called Letter of Intent ("LOI"). Consideration is given to a sale

  • of shares or limited partnership interests ("share deal");
  • of the "active business operations" or parts thereof (customer base, inventory, sales organisation) with/without receivables and liabilities ("asset deal");
  • a (i) majority or (ii) minority shareholding with a blocking minority of more than 25% shares with the option for the subsequent acquisition of the remaining shares.

In addition, the LOI agrees on the criteria for determining the purchase price, the establishment of a virtual data room, the time frame for the due diligence of the potential acquirer and its assurance to maintain confidentiality regarding the documents and information disclosed by the seller.

In addition to the annual financial statements – in general of the last three business years -  and thebusiness assessment together with the lists of totals and balances of the current business year, numerous other details are also of considerable importance for the buyer. Even though the requirements for the documents to be disclosed in the course of due diligence can vary greatly, potential buyers have a steadily growing need for comprehensive information. As the seller’s side has to provide versatile guarantees about the accuracy of the information provided in the context of the sale and purchase agreement (“SPA"), information should be revealed and not be withheld.

During the negotiations of the SPA it must be taken into account that the transfer of all employment relationships to the acquirer of the business is not at the disposal of the contracting parties and is mandatory in the case of both an asset and a share deal. In this context, both the consequences of a transfer of business under labour law and the associated obligations to inform the employees must be taken into account.

Since the purchase price of a company depends on market-specific as well as subjective aspects, there are numerous methods and formulas for determining the value of a company in business theory. A common method is to determine the purchase price according to IDW Institut der Wirtschaftsprüfer in Deutschland eV (“Institute of Auditors in Germany”) standards or on the basis of a multiplier of the EBIT or EBITDA of the company. Tax burdens can differ considerably due to different ways of structuring the purchase price. Tax advice in the run-up to and during the sale process is therefore always advisable.

Due to the economic importance and the possibly far-reaching consequences of faulty, unclear or incomplete provisions, careful drafting of the SPA is extremely important. This applies in particular to the subject matter of the SPA, the ancillary agreements to the purchase price, if applicable a  subsequent increase in the purchase price based on future sales and/or profit developments (so-called earn-out), limitation of the seller's liability and the exclusion of a right of withdrawal.

Finally: In the case of the sale of shares in a limited liability company (“GmbH”), notarisation is mandatory (otherwise such a SPA would be null and void!). In the case of a transfer of limited partnership shares, notarisation is only mandatory if a real estate is part of the assets of the limited partnership.


Frank Alen

Frank van Alen


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