Sale GmbH / Limited Liability Company (Ltd) Germany
How does the sales process work and what does the seller of a GmbH have to consider during the sale under german law?
When the shareholders of a GmbH are preparing a company sale in Germany, there are many legal and tax aspects that need to be considered. Careful preparation of the GmbH sale increases the chances of achieving a high purchase price. Meanwhile, the buyer of the GmbH will attach great importance to the assumption of far-reaching contractual guarantees at the expense of the seller when paying a high purchase price. Appropriate planning of the sale of the company in Germany helps the seller to better control risks.
Further information can also be found on the following topics:
- Taxation of the sale of a GmbH in Germany
- Purchase of a GmbH from the buyer's point of view
For a non-binding inquiry, please contact one of our experts directly by phone or e-mail or use the contact form at the bottom of this page.
Legal expertise in german M&A transactions and the sale of a GmbH
Our attorneys and certified specialists for german corporate law have many years of practical experience in the field of M&A procedures and company sales. From our offices in Hamburg, Berlin, Munich, Frankfurt and Cologne we advise companies, shareholders and investors nationwide:
- Planning of the sale of the GmbH (asset deal and share deal), preparation of a company exposé
- Contractual protection of the seller in the sale of the GmbH (confidentiality agreements, letter of intent, guarantee agreements)
- Share and company valuation
- Vendor due diligence, if necessary
- Tax audit and support of the sales process
Especially in the area of M&A transactions you should rely on the experience of your advisors. We support you in the sale of small and large companies in Germany.
Interests of the contracting party under german law
The seller of a limited liability company should be able to correctly assess the position of the buyer in order to achieve optimal negotiation results in Germany. On the buyer side, it will usually be strategic investors, not infrequently close or distant competitors of the GmbH, or financial investors. The interests of the respective buyer classes are far apart. The financial investor in german practice often already has his disinvestment in mind when buying the GmbH shareholding, i.e. the resale. He strives for a high profit, corresponding to the risk, on his exit (resale). In contrast, the strategic investor usually aims for a longer-term commitment. He is interested in synergy effects and the acquisition of valuable assets (patents, licenses, distribution channels, etc.).
Preparation of the GmbH sale in Germany
A company sale is very often a complex transaction in german practice. Like any multi-layered transaction, the seller of one's own business should be well prepared. In the practice of german law, it is clear that well-prepared transactions protect against unpleasant surprises. The bride must not only be made pretty. In the interest of the seller, risks in the target company must be identified and adequately captured in the german company purchase agreement. In the run-up to the sale, it may be necessary to take appropriate balance sheet measures and improve personnel policy at an early stage. In the case of a larger group of shareholders in the GmbH to be sold, it must be ensured that the negotiator's ability to act on the seller's side is guaranteed during contract negotiations. A clear mandate and corresponding powers of attorney must be ensured. Otherwise, opposing shareholders can thwart the sale of the company.
In the run-up to the contract negotiations, the seller must be clear about the value of the GmbH in Germany. There are various valuation methods that can be used to determine the value of a company. In connection with the search for a buyer, it is common to develop a company exposé that highlights all aspects of the GmbH that are relevant to a buyer. From the seller's point of view, the company exposé is an advertising prospectus, and from the buyer's point of view, it is an initial important source of information in german practice.
German due diligence procedure - risk assessment prior to the sale of shares in the company
As a rule in german practice, the sale of a GmbH is preceded by a risk assessment - the so-called due diligence. The review may concern all sub-areas and legal levels of the target company. In most cases, the risk assessment is carried out from a legal, tax and financial point of view. In german practice, the review is carried out by specialized lawyers or law firms, tax advisors and auditors. If necessary, the GmbH can also be put through its paces from a german technical or environmental law perspective.
As part of the due diligence process, the seller generally provides a data room containing all the necessary information. When selling a GmbH in Germany, the buyer will have specific legal aspects examined by his lawyers. In doing so, he will want to ensure that the GmbH was properly formed and that any capital increases do not contain any errors. In the context of incorporations and capital measures, hidden contributions in kind and legally inadmissible returns of share capital are repeatedly identified in german legal practice. These can lead to liability risks after a sale of the GmbH shares. It is also always checked whether the list of shareholders is correct and the seller is actually also a shareholder of the GmbH under german civil law and whether there are any obstacles to the company takeover under german company law and civil law. After all, the GmbH buyer wants to ensure that the GmbH is not close to a crisis or even insolvency that could lead to liability. The legal due diligence is followed by the tax and economic examination of the GmbH.
The due diligence process in Germany culminates in the so-called due diligence report. This report contains a summary of the lawyers with the audit results for the buyer. The presentation and the scope of the report depend on the size of the transaction (is a small limited liability company or a holding company with a large group of companies to be sold?)
German company purchase agreement - SPA
Based on the findings, the buyer will finally position himself during the contract negotiations. The seller will have to react accordingly to the individual - allegedly risky and value-reducing - items in order not to unduly deviate from his purchase price expectations.
In german practice, the typical provisions and contractual mechanisms in a company purchase agreement on which both parties must agree can be described as follows:
- Warranty provisions and liability standards by which the seller assumes risks;
- Limitation of liability provisions in favor of the seller; and
- Purchase price payment, payment modes and, if applicable, purchase price adjustment (e.g. earn-out: a variable portion of the purchase price will be paid in the future upon achievement of defined results);
- Regulation regarding personnel, with which the transfer of operations is secured;
- Tax and audit clauses;
- Antitrust regulations;
- Statute of limitations provisions;
- Possible restraints of competition
- Arbitration agreements
Depending on whether a corporate entity or a craft business is being sold, the complexity of the company purchase agreement varies.
Taxation of the purchase price in the case of a GmbH sale under german law
The question of taxation of the purchase price at the level of the seller depends on whether the sale of the company is organized as an asset deal or a share deal under german law (background information on the advantages and disadvantages can be found here: Asset Deal versus Share Deal
In the case of a sale of GmbH shares (share deal) by private individuals in Germany, the taxation of the seller depends on whether the shares are held as business assets or as private assets. If the shares are held as private assets and the shareholding is less than 1%, the capital gain is subject to the final withholding tax (25%). Gains on shares held as private assets with a participation of 1% or more are subject to the partial income procedure (40% are tax-free; 60% of the capital gain is taxed at the personal tax rate). The partial income procedure also applies to disposals of business shares held as business assets. In the case of an asset deal, the GmbH itself is the seller in german practice. Current german corporation tax and trade tax are payable on the profit accruing to it as a result of the purchase price. For information on the taxation of share sales in connection with affiliated companies (group structure: parent company sells subsidiary company) and other tax issues, please click here: Taxation of sale of GmbH Germany
Disputes during the sale of a company in Germany (post-M&A disputes)
If a company sale is not accompanied sufficiently professionally, also on the legal side, disputes often arise during or at the latest after the sale in Germany. A classic area of conflict is the so-called purchase price adjustment clauses or downstream purchase price payments (so-called "earn-outs"). However, contractual guarantees are also a frequent cause for dispute in german practice.
The situation becomes particularly serious when the seller is accused of fraudulent misrepresentation or even fraud. In addition to high claims for damages, the seller may even face criminal prosecution.
Finally, conflicts also frequently arise if the seller of the company remains in the company as an executive or even as a managing director even after the sale.
You can find more information on disputes after the sale of a company here: Dispute after company sale in Germany
Our team of german business lawyers and M&A tax advisors
When drafting and negotiating the company purchase agreement in Germany - regardless of whether it is an asset deal or a share deal - the seller of the GmbH relies on specialized business lawyers and tax advisors. If you have any questions regarding the sale of a GmbH, please do not hesitate to contact us at our offices in Hamburg, Berlin, Munich, Frankfurt or Cologne without obligation.