Selling a Company in Germany: Process, Buyer Types, Costs and Taxes

How does selling a company in Germany work?

The process follows a proven sequence, and each step builds on the one before. Skip a step and you pay for it later, in price or in legal certainty.

Preparation. First the company is made ready to sell. That means reliable figures for the last three years, contracts and shareholdings in order, and a clear answer to what is actually being sold. Many sellers commission a vendor due diligence at this stage, an examination of their own company from the buyer's perspective, to know the weak points before the buyer does. In parallel, a valuation is prepared, usually on a capitalised-earnings or a multiples basis, to support the asking price.

Approaching buyers. Working from an anonymised short profile, the seller draws up a list of possible acquirers and approaches them. Interested parties first sign a confidentiality agreement before they receive a detailed information memorandum setting out the key figures and the story of the business. The first responses narrow the field to a shortlist.

Indicative offer and letter of intent. Serious bidders submit an indicative, non-binding offer. On that basis the parties negotiate a term sheet or a letter of intent, which records the main points and grants the preferred buyer exclusivity for the due diligence phase.

Due diligence. The buyer examines the company in detail, usually through a virtual data room holding the legal, tax and financial documents. Risks that surface here feed back into the price or into additional warranties and indemnities.

Contract, signing and closing. The findings shape the purchase agreement. On signing, the contract is concluded. The transfer itself (closing) often follows later, once conditions precedent are met, such as merger-control clearance or payment of the purchase price. Only at closing do the shares or assets actually pass.

What are the five buyer types when you sell a company?

Who you sell to determines the price, the certainty of closing and what becomes of the company after the handover. In practice, five types of buyer can be told apart.

Strategic buyers are competitors, customers or suppliers for whom your company fits into their own value chain. Because they can realise synergies, through shared distribution or combined purchasing, they often pay the highest price. The price for that strategic premium is usually a deeper integration, one in which the site, the brand and the workforce do not stay untouched.

Financial investors, that is private equity firms, buy to earn a return over a holding period of typically four to seven years. They value soberly, by earnings power and growth potential, and often work with borrowed capital. What makes them attractive for a seller is the option to share in the further increase in value through a rollover stake or a buy-and-build strategy.

Family offices and industrial holding companies invest for the long term and without the exit pressure of a fund. They rarely pay top prices, but they often offer continuity and a calmer handover, which matters to sellers who care that their life's work continues.

Management takes over in a management buy-out (MBO) from within the company's own ranks. In a management buy-in (MBI) an external manager steps in. These buyers either know the company or bring entrepreneurial experience, but they regularly need a bank or a financial investor alongside them to fund the purchase.

Private individual investors, finally, are wealthy individuals or successors who become self-employed by buying the business. This type comes into play mainly with smaller companies and often through business-succession exchanges. Here the certainty of closing depends more heavily on the individual's financing than it does with institutional buyers.

What is a term sheet when you sell a company?

A term sheet sets out the essential points of the planned sale in writing before the contract itself is drafted: the purchase price or price range, the transaction structure, the timetable, exclusivity and confidentiality. It differs from the closely related letter of intent mainly in form, not in function. Both document the parties' understanding of the deal in outline.

The decisive question is its binding effect. In its core commercial statements a term sheet is deliberately non-binding, so that the later due diligence and contract negotiation still have room to move. Individual clauses bind nonetheless once they are expressly marked as binding, in particular exclusivity, confidentiality and the allocation of costs. With exclusivity, the seller grants the buyer a time-limited right to negotiate alone and so takes the company off the market for a few weeks or months. Draft these passages carelessly and you commit yourself earlier and further than you intended.

What costs arise when you sell a company?

Costs depend more on the process and complexity than on any fixed percentage formula. Typical components are:

M&A advice. This commonly covers preparation, valuation, buyer outreach and management of the process. Fees often combine a retainer with a success component and vary with deal size, competitive tension and the intended breadth of the buyer approach.

Legal advice. Legal cost arises from structuring, the data room and vendor due diligence, the term sheet, purchase agreement, disclosure, regulatory work and closing. Complexity, the number of shareholders, cross-border elements, real estate and negotiation intensity are key drivers.

Tax and financial advice. Tax advisers and accountants support the tax structure, valuation, financial fact book or vendor due diligence and the purchase-price bridge. Their work increases where historic adjustments, multiple entities or a carve-out need to be prepared.

Notary and registers. A sale of GmbH shares involves value-based notarial fees. Commercial-register, land-register and other completion costs may arise depending on the structure.

Process infrastructure and insurance. The data room, translations, management presentations and, where used, W&I insurance form further cost categories. Whether the seller pays them directly or they are reflected economically in the purchase price is part of the deal structure.

Management and employee arrangements. Retention or transaction bonuses may be appropriate to retain key individuals through closing and recognise the additional sale workload. They should be reflected early in the employment, tax and funds-flow analysis.

A credible budget distinguishes fixed preparation costs, ongoing advice, success fees and third-party costs. It should also clarify whether costs may be borne by the individual seller, a holding company or the target and how they are treated for tax.

How is a company sale taxed?

Tax depends on the seller, legal form, size of the holding and transaction structure. A reliable answer requires an individual calculation.

Privately held GmbH shares

Where an individual held at least one per cent directly or indirectly at any time during the previous five years, the gain is generally taxed under Section 17 EStG. Under the partial-income method, 60 per cent of the gain is taxable and 60 per cent of related expenses may generally be deductible. The effective burden depends on the personal rate, solidarity surcharge, church tax and other circumstances.

Shares held by a corporation

A capital gain realised by a corporate holding company is generally 95 per cent exempt under Section 8b KStG, with five per cent treated as non-deductible business expenses. The proceeds remain in the holding company, however. A later distribution to the individual owner creates a further tax layer. Contributions, holding periods and anti-avoidance rules must also be considered. A holding company should not simply be inserted shortly before sale on the strength of the 95 per cent rule.

Sole businesses and partnerships

Sections 16 and 34 EStG may apply to a sale of an entire business, qualifying part or full partnership interest. Relief depends on personal and technical conditions. A sale of individual assets is generally taxed as current income.

Asset sale by a GmbH

Where the operating GmbH sells its assets, the gain is first taxed at company level and is generally subject to corporation and trade tax. A later distribution of the proceeds to shareholders adds a second tax layer. This often makes an asset deal less attractive to the seller than a direct share sale.

VAT and real estate transfer tax

A share sale may be outside the scope of VAT or exempt depending on the seller. An asset deal may qualify as a transfer of a going concern if an operational unit passes to another entrepreneur. Individual assets require separate VAT analysis.

Real estate or property-rich companies may trigger German real estate transfer tax. The share-deal rules are complex and should be modelled early.

The tax structure should be settled before buyer outreach. Once an LOI has been signed, major restructurings are often more difficult and may no longer be tax-neutral.

What legal points matter most in a company sale?

Five themes drive net proceeds and closing certainty.

1. Price mechanics

Enterprise value must be bridged to equity value through net debt, cash, working capital and other adjustments. A locked box fixes the price early and controls leakage. Closing accounts adjust it by reference to completion figures. Earn-outs, rollover equity and vendor loans defer part of the proceeds and risk.

2. Warranties, indemnities and disclosure

Warranties address contractually defined states of the business. Specific known risks are commonly dealt with through indemnities, pricing or specialist insurance. The disclosure letter and data room determine, within the agreed regime, what counts as disclosed. Caps, time limits and exclusions need to match the actual risk.

3. Closing certainty

A high price has limited value if financing is uncertain or the offer carries broad conditions. Financing evidence, merger control, FDI review, corporate approvals, change-of-control consents and exclusivity should be assessed. The agreement needs a long-stop date and a clear allocation of clearance risk.

4. Transition and continuing involvement

Where the seller remains as managing director, consultant or minority shareholder, role, remuneration, governance, leaver provisions and the exit from rollover equity must work together. Restrictive covenants, transition services and communications also need planning.

5. Share deal or asset deal

In a share deal, the company remains the contracting party and employer, subject to change-of-control clauses. In an asset deal, assets must be transferred with sufficient certainty, contracts require assignment and employees may transfer under Section 613a BGB.

A good agreement does not eliminate every risk. It identifies which risks are priced, which remain with the seller and which pass to the buyer at completion.