Selling a business in Germany: the process, types of buyers, costs and taxes

What is the process for selling a business?

The process follows a tried-and-tested sequence, with each step building on the previous one. Skipping any of these steps will result in a lower price or a loss of legal certainty later on.

Preparation. First, the business is made ready for sale. This includes reliable financial figures for the last three years, well-organised contracts and shareholder structures, as well as clarifying exactly what is being sold. Many sellers commission due diligence from a vendor at this stage – that is, an assessment of their own business from a buyer’s perspective – to identify weaknesses before the buyer does. At the same time, a valuation is carried out, usually using an income approach or a multiples method, to justify the asking price.

Approaching buyers. Based on an anonymised brief profile, a list of potential buyers is drawn up and they are approached. Interested parties first sign a confidentiality agreement before receiving a detailed information memorandum setting out the company’s key figures and business story. A shortlist is drawn up based on the initial responses.

Indicative offer and letter of intent. Serious prospective buyers submit an indicative, non-binding offer. On this basis, the parties negotiate a term sheet or letter of intent, which sets out the key terms and grants the preferred buyer exclusivity for the due diligence phase.

Due diligence. The buyer conducts a detailed review of the company, usually via a digital data room where legal, tax and financial documents are made available. Any risks identified are subsequently reflected in the purchase price or in additional warranties and indemnities.

Contract Negotiation, Signing and Closing. The results of the due diligence form the basis of the company purchase agreement. The contract is concluded upon signing; the actual transfer (closing) often takes place later, once conditions precedent have been met, such as antitrust clearance or payment of the purchase price. It is only upon closing that the shares or assets are actually transferred.

What are the five types of buyer when selling a business?

Who you sell to determines the price, the likelihood of a successful sale and what will become of the business after the handover. In practice, five types of buyer can be distinguished.

Strategic buyers are competitors, customers or suppliers for whom your business fits into their own value chain. Because they can generate synergies – for example, through joint sales or consolidated purchasing – they often pay the highest price. The price to pay for this strategic premium is often a deeper level of integration, in which the location, brand and workforce are not left untouched.

Financial investors – that is, private equity firms – buy with the aim of generating a return and typically have an investment horizon of four to seven years. They make a sober assessment based on profitability and growth potential and frequently use debt financing. Of interest to the seller is the opportunity to participate in further value growth through a buy-back arrangement or a ‘buy-and-build’ strategy.

Family offices and industrial investment holding companies invest for the long term and without the pressure to sell that a fund faces. They rarely pay top prices, but in return often offer continuity and a smoother transition, which is important to sellers who care about the continued existence of their life’s work.

In a management buy-out (MBO), management takes over from within the company’s own ranks, whilst in a management buy-in (MBI), an external executive takes the helm. These buyers either know the company well or bring entrepreneurial experience to the table, but regularly need a bank or a financial investor on board to secure financing.

Finally, private individual investors are high-net-worth individuals or successors who become self-employed through the purchase. This type of transaction is particularly common with smaller companies and often takes place via succession marketplaces. Here, the likelihood of a successful deal depends more heavily on individual financing arrangements than is the case with institutional buyers.

What is a term sheet in a business sale?

A term sheet sets out the key terms of the planned sale in writing before the actual contract is drawn up: purchase price or price range, transaction structure, timetable, exclusivity and confidentiality. It differs from the Letter of Intent – which is similar in content – primarily in its format, not in its function. Both documents set out the broad terms of the agreement.

The key distinction lies in the question of legal binding effect. A term sheet is deliberately non-binding in its core commercial provisions, so as to leave room for subsequent due diligence and contract negotiations. However, individual clauses are binding as soon as they are expressly designated as such, in particular those relating to exclusivity, confidentiality and the allocation of costs. By granting exclusivity, the seller grants the buyer a time-limited right to exclusive negotiations, thereby taking the company off the market for a few weeks or months. Anyone who formulates these passages without due care may find themselves bound earlier and to a greater extent than they had intended.

What costs are involved in selling a business?

The costs depend more on the process and complexity than on a fixed percentage formula. Typical components include:

M&A advisory. This typically covers preparation, valuation, buyer outreach and process management. The fee structure often combines an ongoing retainer with a performance-based component and depends on the size of the transaction, the level of competition in the process and the desired scope of the buyer outreach.

Legal advice. Legal fees are incurred for structuring the deal, the data room and vendor due diligence, the term sheet, the purchase agreement, disclosure, regulatory issues and closing. Key factors include, in particular, the complexity of the transaction, the number of shareholders, foreign interests, property holdings and the intensity of the negotiations.

Tax and financial advice. Tax advisers and auditors assist with the tax structure, valuation, financial fact book or vendor due diligence, and the purchase price bridge. Their costs increase if historical adjustments, multiple companies or a carve-out need to be prepared.

Notary and registers. The sale of GmbH shares incurs notary fees based on the value of the transaction. Depending on the structure, costs relating to the commercial register, land register and other completion costs are also incurred.

Transaction infrastructure and insurance. The data room, translations, management presentations and, where applicable, W&I insurance constitute further cost categories. Whether the seller bears individual costs or whether these are factored into the purchase price is part of the transaction structure.

Management and employee measures. Retention or transaction bonuses may be useful to retain key personnel until closing and to compensate for the additional effort involved in the sale process. These should be taken into account at an early stage from the perspectives of tax, employment law and cash flow.

A sound budget distinguishes between fixed preparation costs, ongoing consultancy fees, performance-related remuneration and potential third-party costs. It is also crucial to determine whether costs may be borne by the seller personally, by a holding company or by the target company, and how they are treated for tax purposes.

How is the sale of a business taxed?

The tax implications depend on the seller, the legal form of the company, the level of shareholding and the structure of the deal. A reliable assessment therefore requires an individual calculation.

Privately held GmbH shares

If a natural person has held a direct or indirect stake of at least one per cent within the last five years, the capital gain is generally recognised in accordance with Section 17 of the Income Tax Act (EStG). Under the partial income method, 60 per cent of the gain is taxable. Similarly, 60 per cent of the related expenses may, in principle, be taken into account. The effective tax burden depends on the individual’s tax rate, the solidarity surcharge, church tax and other circumstances.

Shares held by a corporation

If a corporation disposes of its shareholding, 95 per cent of the gain is generally excluded from taxation under section 8b of the Corporation Tax Act (KStG). Five per cent is treated as a flat-rate, non-deductible business expense. As a result, the tax burden at holding company level is usually significantly lower. However, the proceeds initially remain within the holding company. A subsequent distribution to the individual triggers further taxation. Furthermore, contribution procedures, lock-up periods and anti-abuse rules must be observed. A holding company is therefore not set up shortly before the sale solely on the basis of the 95 per cent rule.

Sole traders and partnerships

When selling a business, part of a business or an entire share in a partnership, Sections 16 and 34 of the German Income Tax Act (EStG) may apply. Tax allowances and preferential tax rates depend on personal and factual requirements. The sale of individual assets, on the other hand, is generally subject to taxation on an ongoing basis.

Asset deal via a GmbH

If the operating GmbH sells its assets, the profit is initially recognised by the GmbH and is subject to corporation tax and, as a rule, trade tax. If the remaining proceeds are subsequently distributed to the shareholders, a second level of taxation applies. From the seller’s perspective, an asset deal is therefore often less attractive from a tax perspective than the direct sale of shares.

Value Added Tax and Land Transfer Tax

Depending on the seller’s status, the sale of shares may not be taxable or may generally be exempt from VAT. An asset deal may be exempt from VAT as a transfer of a business as a whole if a viable business unit is transferred to an entrepreneur. If only individual assets are sold, VAT must be assessed separately.

Land or companies owning land may be subject to land transfer tax. In the case of a share deal, complex rules regarding shareholdings and attribution apply, which must be modelled at an early stage.

In a share deal, the shares in the company are sold. The company remains the owner of its assets and the contractual partner of its customers, suppliers and employees. For a natural person, the capital gain may be taxed in particular under Section 17 of the Income Tax Act (EStG). Where the seller is a corporation, Section 8b of the Corporation Tax Act (KStG) may be relevant. Historical liabilities remain with the company and are therefore allocated via due diligence, warranties and indemnities. In the case of shares in a limited liability company (GmbH), the contract must be notarised.

In an asset deal, the company disposes of individual assets and legal relationships. Contracts must generally be transferred individually, whilst employment relationships may be transferred by operation of law in the event of a transfer of an undertaking under Section 613a of the German Civil Code (BGB). The capital gain initially arises at the level of the company. A subsequent distribution may trigger a second stage of taxation. In return, the purchaser can select assets more selectively and obtain a new tax depreciation base. Land regularly triggers immediate land transfer tax, and the contract is subject to notarisation insofar as it covers real estate.

The tax structure should be finalised before approaching potential buyers. Once a Letter of Intent (LOI) has been signed, making significant changes to the structure is often more difficult, riskier or no longer economically neutral.

What are the key legal considerations when selling a business?

Apart from the structure, five key factors determine the net proceeds and the certainty of a successful transaction.

1. Purchase price and mechanism

Enterprise value and equity value must be clearly linked via net debt, cash, working capital and other adjustment items. With a ‘locked box’ arrangement, the price is fixed at an early stage and leakage is controlled. In contrast, closing accounts adjust the price based on the final figures. Earn-outs, profit-sharing or seller loans defer part of the proceeds and risk into the future.

2. Warranties, Indemnities and Disclosure

Warranties cover contractually defined conditions. Known individual risks are typically addressed through indemnities, purchase price adjustments or special insurance policies. The disclosure letter and data room determine, to the agreed extent, which facts are deemed to have been disclosed. Limits of liability, time limits and exclusions must be commensurate with the actual risk.

3. Certainty of completion

A high price is of little value if the financing is uncertain or the offer is subject to far-reaching conditions. Proof of financing, regulatory approvals, foreign direct investment (FDI) and merger control, board approvals, change-of-control consents and the duration of exclusivity must all be verified. A long-stop date, withdrawal rights and risk allocation in the event of non-approval must be included in the contract.

4. Transition and Continuity

If the seller remains involved as a managing director, adviser or minority shareholder, their role, remuneration, governance, leaver rules and exit from the residual shareholding must be aligned. Non-compete covenants, handover, the TSA and communication with employees and business partners must also be planned.

5. Share Deal or Asset Deal

In a share deal, the company remains the contracting party and employer. Change-of-control rights, in particular, must be examined. In an asset deal, assets must be transferred in a sufficiently specific manner, contracts must be assumed, and employees must be treated in accordance with Section 613a of the German Civil Code (BGB). The apparent freedom to purchase only the desired assets is limited by rules governing consent, liability and transfer.

A good sale agreement does not eliminate every risk. It makes it clear which risks are included in the price, which the seller retains and which are borne by the buyer after closing.