Selling a company
We are at your side DURING a company sale: FROM START TO FINISH
You would like to sell your company or business? Then it is crucial for you how much money is left after taxes. We keep that in mind while we assist you with taxes throughout the selling process.
Thanks to our transaction experience, we know what to expect and what the other side expects from you. We can help make the sale of your company a success far beyond the tax aspects.
Preparatory phase 1: Preventive restructuring
Long before a sale, it makes sense to restructure a company in such a way that the subsequent transaction can be carried out as tax-efficiently as possible.
During this first stage, we can already analyse possible measures for you – such as setting up a holding structure, separating certain assets or changing the legal form of your company. However, such steps often have to be implemented years before the sale in order to work properly. So please contact us as soon as possible!
Preparatory phase 2: Tidying up the tax documents
Before you allow a potential buyer to view your tax records, they should be in good order; we will be happy to assist you with that. It naturally makes a better impression on a prospective buyer if their questions are answered immediately – instead of leading to frantic searching. Since we are familiar with the perspective of a company buyer, you and your tax department will also benefit from our support in this preparatory phase.
Just before the transaction: Planning the sale structure
The tax burden incurred by selling your company is the most important factor when choosing a sale structure. This can concern whether an asset deal or a share deal should take place, or at what level you sell your company. We will happily explore various approaches with you and conduct model calculations for the different options.
If you want to sell only part of your company, we will show you how best to organise the sale in technical terms.
And if you wish to acquire a stake in the acquiring company (also known as re-investing), we will structure the process for you in such a way that you don’t have to pay any taxes on the part of the company for which you don’t receive a cash purchase price.
Due diligence process, vendor due diligence and tax factbook
We gladly support you and your tax department during due diligence. Since we do the tax due diligence ourselves, we know how to answer any questions people may pose.
In certain situations, it may make sense for the seller to ask their own tax experts, before the sale, to conduct due diligence, also called vendor due diligence.
Alternatively, you can create a tax factbook: a compilation of tax-relevant information, but without risk analysis. Only due diligence entails an analysis of risk.
Selling a company: Contract negotiation and tax provisions
During the contract negotiations, we aid you not only with the tax provisions, but also with our background in figures and balance sheets. Especially in the case of complex purchase price formulas, our economic insights are a key factor in successfully negotiating a purchase price.
Selling a company: Tax audit and warranty
The sale will almost certainly lead to a Tax Audit, the results of which you as the previous owner of the company usually are accountable for – at least in part, due to a regulation in the sales contract. We support you during the Tax Audit and make sure that the new owner of the company respects your rights. If necessary, we then discuss with him whether and, if necessary, to what extent you should actually be liable.
We summarised the essential tax implications of a company sale for the seller and the attendant opportunities in the standard work Holzapfel/Pöllath, Unternehmenskauf in Recht und Praxis, 15th edition, 2017, pages 32-141.
And here you will find an overview of the Transactions we have accompanied (on the seller’s or buyer’s side) in recent years, provided that they have been published.
Your company can be restructured as to minimise the tax burden of a sale.
Restructuring can be achieved by establishing a holding structure: You set up a holding company in the legal form of a GmbH (limited liability company) above your operating company. If this GmbH sells the operating company, taxation is usually (but not always!) more favourable than if you personally sell the operating company:
- If the operating company is also a GmbH (or an AG or SE), the capital gain at your holding company is almost entirely tax-free.
- If the operating company is a GmbH & Co. KG (limited partnership with a limited liability company as general partner), at least the tax rate of the holding company of approx. 30% is significantly lower than if you personally sell the GmbH & Co. KG – and your personal top tax rate of as much as 47% applies!
But the involvement of such a holding company also means that the proceeds from the sale will first belong to this holding company. Doing so is usually a sensible solution if you intend to invest the proceeds from the sale in another company or in participations. After all, the holding company is usually taxed more favourably for income from these investments than you would be personally.
However, if you wish to use the proceeds from the sale of your company privately, for example to finance your retirement, you must distribute the money from the holding company. And this results in additional taxation (dividend taxation), albeit at a preferential tax rate of 25%.
Put very simply, a holding company is particularly advantageous if the proceeds from the sale of the company are to be reinvested.
Occasionally, separating certain assets in timely preparation for the sale of a company can also make sense. In particular, removing real estate assets can enhance the transaction, as the buyer does not have to finance the assets’ value. What’s more, you can generate additional income from future rental income that you perhaps cannot earn by investing the proceeds of a sale at current interest rates.
Change of legal form / Transfer
Occasionally, a change in the legal form of the company or a transfer to a KG (private partnership) can also open up access to a more favourable tax regime.
If, for example, your company is a GmbH & Co. KG, its sale is taxable at your personal tax rate (up to 47% with German solidarity surcharge), and may even be subject to trade tax. If, on the other hand, your company is a GmbH, only 60% of the profit from the sale is taxable; the effective tax rate will therefore be approximately 28%. If you are over 55 years old, you can be subject to similarly favourable taxation when selling a GmbH & Co. KG within certain limits and only once in a lifetime.
If they are to be effective, such measures must be implemented early on – sometimes years before the sale of the company. Short-term implementation is often at odds with tax blocking periods, which generally last between three and seven years!
Advantages of vendor due diligence
In certain situations, it can be useful for the seller to conduct due diligence. Doing so offers several advantages:
- A company can become more appealing if the buyer receives essential information in the report of a third party. Here, vendor due diligence builds confidence.
- The sale itself is accelerated, because it is much easier for the potential buyer’s advisors to familiarise themselves with the information. Especially in a bidding process, in which negotiations are conducted with several prospective buyers at the same time, completed vendor due diligence saves you, the seller, a lot of work because you have to answer fewer questions all at once.
- You recognise existing tax risks before the negotiations, instead of being made aware of them by the other party. This allows you to eliminate problems in advance, or at least actively deal with them during contract negotiations.
Calculating the purchase price
There are several methods currently used on the market to determine the purchase price of a company. Which method is right and best for you depends on what kind of company you run: small or large, commercial or freelance, with or without large fixed assets, etc. We will be happy to assist you and your tax consultant in determining a good negotiation proposal.
It is not uncommon for a potential buyer to confront you with a purchase price calculation that initially seems strange: EBIT multiplier, cash-free, debt-free, etc. We can translate what that means and we can also explain the impact this has on the actual purchase price. And as lawyers, we can then translate these formulas into appropriate and sound contractual clauses.
Asset Deal or Share Deal?
The sale of a company can be structured differently under company law and tax law. The question of whether the transaction should be structured as a share deal or as an asset deal is particularly important:
- A share deal is when the seller sells their shares in the company that operates the business. This means that the purchaser acquires an interest in a company, not the individual assets of that company.
- In an asset deal, on the other hand, the investment in the company is not the object of purchase, but rather the individual assets of that company. The company itself acts as the seller and can then reinvest the purchase price or distribute it to the shareholders. The buyer can acquire all of the company’s assets (including goodwill) or exclude individual assets from the transaction, for example for liability reasons.
Depending on what the parties choose, the tax consequences for the vendor and the purchaser can differ. For example, an asset deal typically leads to higher write-offs for the buyer and thus to a lower tax burden in the future (higher book value, new depreciation period). By contrast, the seller of a KG benefits from a lower tax burden in the case of a share deal (partial-income method). We are happy to calculate the various effects for the parties in the transaction and help them select the right approach.
In the case of a KG (or another partnership), share deals are not possible for tax purposes. Even if the shares in the company are sold, this is treated in the same way fiscally as the sale of the individual assets of the KG (asset deal).
Deferred purchase price
In principle, the following rule applies when a company is sold: The agreed purchase price is taxed immediately, even if payment is made later. A deferred purchase price therefore does not lead to a deferred tax. Basically, the rules of the game are the same as for a balance sheet.
For you, this means that if the payment of the purchase price is stretched, special care must be taken from a tax perspective. We take particular care that parts of the purchase price that are not immediately paid out to you are designed in such a way that they are not immediately taxable.
Sale of part of a company
A company does not have to be sold in its entirety. You can also sell part of the business and keep the rest.
There are various possibilities of sensibly structuring the sale of part of a company. The simplest form is a partial asset deal – you sell the assets of the corresponding part of the company. We can also form a new, separate company for you with the part to be sold, which is then to be sold. Alternatively, the part you want to keep, for example, can be separated from a company and this company can then be sold. The best solution depends on the specific circumstances of your company – we will be happy to identify them for you.
Partial sale and re-investment
In many cases, the company is not supposed to be sold in its entirety. As the seller, you can retain an interest in the company. Financial investors, in particular, are known to favour that in order to secure the seller’s business expertise.
Needless to say, the easiest way to achieve this is to sell only a portion of your company. Often, however, the complete takeover of the company by an acquiring company is the goal. The previous owner, i.e. you, will then have a share in this acquiring company. Of course, such a re-investment should as far as possible not trigger any additional tax payments. A certain standard has evolved for this in Germany, in the development of which we were involved in the course of our careers. Technically, this re-investment is made possible by a combination of sale and contribution into the acquiring company by way of a non-cash capital increase.
In the context of a sales contract, the tax provisions are quite significant. It defines to what extent you, as the previous owner, are liable for the tax risks of the sold company. And it regulates to what extent you will be involved in future tax proceedings and for the results of which you could be liable. This part is almost as important as the actual liability regulation, because if you are not fully aware of the details, the buyer and the tax authorities could (theoretically) do almost anything at your expense.
We can negotiate for you tax provisions that are not one-sided to your detriment and in which you retain the necessary degree of influence. We know which levers to pull to ensure effective protection of your interests.
In the case of larger company sales, we typically discuss tax provisions with tax experts of the counterparty and in connection with the other contract negotiations. Here, we benefit from the fact that, as lawyers, we also have the legal understanding of contracts and their wording – and have repeatedly challenged tax provisions before courts or arbitration tribunals.
Sale to a financial investor
Are you considering selling your company to a financial investor? We regularly advise financial investors and therefore know the ins and outs of the industry. As a result, we can help you understand your potential contract partner. What matters to them? What is important to them? Occasionally, we even serve as interpreters – after all, midsized companies and investors speak different languages.