Purchase price for the purchase of a GmbH in Germany

Company valuation, purchase price negotiation, purchase price clauses in german company purchase agreements (SPA)

The most frequent reason for the failure of contract negotiations in the purchase of a company is the disagreement regarding the amount of the purchase price. Buyers and sellers pursue very different goals, which is also noticeably reflected in the purchase price negotiations. When it comes to the amount of the purchase price, the company valuation is the basis of the negotiations in german practice. However, there are many ways of structuring the purchase price that can take into account the interests of both parties. Basically, a fixed price with adjustment clauses as well as variable purchase price components are conceivable.

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Legal expertise in company acquisitions and transfers of shareholdings in german practice

Our team of lawyers, certified specialists for german corporate law and tax advisors has many years of experience in M&A measures and company acquisitions. The scope of services provided by our lawyers includes the following areas:

1. Due diligence in the case of acquisitions of limited liability companies and participations in companies
2. Planning and management of M&A processes
3. Company valuation and share valuation
4. Drafting of company purchase agreements (SPA) and asset deal purchase agreements
5. Tax support in the purchase and sale of companies

Procedure of the purchase of a GmbH in Germany

Each procedural step in the purchase of a company usually follows a similar pattern in german practice. The most important steps are:

1. Pre-contractual declarations of the parties in a so-called Letter of Intent (LoI)
2. Due diligence of the buyer to analyze the GmbH
3. Decision between asset deal and share deal
4. Agreement of the purchase contract and initial purchase price negotiations based on the company valuation
5. Conclusion of the GmbH purchase agreement (notarization)
6. Execution of the purchase agreement with fulfillment of the so-called closing conditions

A description of the entire process of a GmbH purchase/sale can be found here: Purchase GmbH

Company valuation and purchase price negotiations in the purchase of a GmbH in Germany

The purchase price agreement is a central part of the contract negotiations. The decisive basis for this is the company valuation in Germany. This is determined on the basis of the results of the buyer's due diligence as well as the financial statements of the target company provided by the seller. Due to the material importance of the balance sheet results, in german practice, the buyer usually obtains a no-fault guarantee from the seller for the correctness of value-determining factors. There are different methods for the subsequent valuation. In this respect, german case law has not specified any method; rather, it is up to the parties involved to choose the method that is suitable depending on the objective and the interests at stake. A rough distinction can be made between the surplus-oriented method, the net asset value method and the multiplier method.

• In german practice, the surplus-oriented methods are relevant, in particular the capitalized earnings value method and the discounted cash flow method applied in accordance with the IDW S1 standards of the Institute of Public Auditors in Germany. The capitalized earnings method is based on the company's future revenue surpluses, which are then discounted to a valuation date. The capitalized earnings value method is particularly practicable for small and medium-sized companies that are not represented on the capital market. The discounted cash flow method, on the other hand, is not based on the company's earnings, but on the total discounted cash flows expected to flow from the company to its owners over the course of a long-term plan.
• Under the net asset value method, the value is determined by calculating the cost of reconstructing the company on the basis of all tangible and intangible assets, including hidden reserves, less liabilities. Future financial surpluses, however, are not taken into account.
• In addition, there is also the so-called simplified capitalized earnings value method, which, however, is not relevant for german company purchase practice, as it is only applied in relation to the tax authorities. The simplified capitalized earnings method is the successor to the so-called Stuttgart method, which was declared unconstitutional.
• However, due to its simpler handling, the so-called multiplier method is of importance when determining the value of small and medium-sized companies in Germany. It is based on the assumption that companies with similar characteristics and key figures are also valued similarly on the market. The company value is calculated by multiplying the key figures of the target company with important current and future key figures (multipliers) of comparable companies. All relevant reference figures can be considered as multipliers, in particular, for example, sales, EBIT or EBITDA. However, special quantity figures, such as the number of customers, can also be used. For a valuation that is as appropriate as possible, at least two multiples should be used. However in german practice, the multiples method should be used with caution, as it is ultimately based on a market comparison, which also depends to a large extent on the current situation in the respective industry. For larger companies, the method should therefore only be used as a supplement to DCF valuations.

Purchase price structuring and purchase price clauses in the german company purchase agreement

The central aim of the parties' contract negotiations is to reach an agreement on a specific purchase price. In doing so, all price-forming factors must be taken into account. In particular, the respective tax situations of the parties, the market and industry environment, the retention and performance of the previous management, as well as possible ancillary services (e.g. notary fees, consulting fees, real estate transfer tax, payments of profit distributions, etc.) can be price-determining in german practice. It must be taken into account that different arrangements of the purchase price and the purchase price payment are possible.

At first glance, the most straightforward option is to agree on a fixed purchase price. Often, however, the parties do not have all the relevant data at the time of the purchase price negotiations. In these cases, there is a need to adjust the purchase price at a later date. For this purpose, in german law a provisional purchase price is fixed with so-called purchase price adjustment clauses. The following models have proven successful in german practice when it comes to structuring these clauses:

Frequently, and particularly practicable for smaller and medium-sized companies in Germany, is the agreement that the final purchase price will be determined on the basis of a settlement balance sheet to be drawn up on the transition date. For the purpose of determining the purchase price, a deviation from the accounting rules of §§ 238 et seq. HGB by means of contractual provisions.

For larger corporate transactions, on the other hand, the more complex but more accurate purchase price adjustment according to the "cash free - debt free" principle is advisable in german practice. For the purpose of determining the purchase price, the company is placed in a position as if it had neither cash ("cash free") nor external liabilities ("debt free"). This assumption is intended to help neutralize the different financing and liquidity situations.

However, if the parties have completely different price expectations, agreement on a variable purchase price can help. An agreement is then initially reached on a base purchase price and a variable portion. In german practice, this is done by agreeing so-called earn-out clauses. The maturity of the variable purchase price component then depends on the target company achieving the agreed performance targets. In addition to the higher chance of reaching an agreement, accepting an earn-out agreement can also be an indication of the seller's reliability, as the seller is obviously convinced of the positive development. In addition, the risk is considerably reduced for the buyer, as he only has to pay the variable part if the company actually develops accordingly. If an earn-out clause is agreed, in german practice, the parties must define the period (earn-out period), the relevant key figures (earn-out performance indicators). An individually appropriate length should be agreed for the earn-out period, i.e. the period by which the agreed targets must be achieved. Financial factors, such as sales or cash flow, as well as individual variables, such as the granting of patents or the launch of new products, can be used as key performance indicators.

This mechanism can be a great help in finding a balanced agreement and leading the purchase price negotiations in Germany to success.