The sale of a company almost always follows a well-established sequence. Knowing the individual steps makes it easier to judge when to release which information, at what point commitments become binding and where there is still room to manoeuvre.
Preparing the process
Before the first buyer is approached, a few foundations should be in place: a clear view of your own goals and limits, prepared figures for recent years together with a business plan, a list of potential buyers, and a plan for who in the company is told what and when. The articles of association also need checking. Under German law they may make the transfer of shares subject to further conditions, in particular the company's consent (section 15(5) GmbHG), and they sometimes give fellow shareholders pre-emption rights. Some sellers have an auditor review their figures in advance to avoid surprises later in the process.
Another early decision is whether to approach several interested parties in parallel or only one to begin with. Competition strengthens your position on price; a small circle protects confidentiality. Weighing the two is one of the first strategic choices.
First contact and the confidentiality agreement
Initial contacts are usually anonymous. A short profile without the company name, often called a teaser, describes the business, its size and the reason for the sale. Only once a party has signed a non-disclosure agreement does it learn the name and receive further material. The agreement sets out what the information may be used for, who may receive it, that employees and customers will not be poached, and what happens to the documents if talks end.
Such an agreement reduces the risk but does not remove it. Information is therefore released in stages: first what is needed for an initial offer, and the truly sensitive material only towards the end.
Exchanging information
Interested parties now receive a more detailed presentation of the company. In larger processes this is an information memorandum covering the business model, market, customers, organisation, figures and plan. For smaller companies, a leaner pack of presentation, annual accounts and business plan is often enough. Meetings with the owner follow, and possibly a site visit, which can be arranged outside working hours.
Indicative offer and letter of intent
On this basis, interested parties submit an indicative, that is non-binding, offer. It states a price or price range with the underlying assumptions, the intended financing, conditions and timetable. A letter of intent is then negotiated with one or a few bidders. It is essentially non-binding but usually contains a few binding clauses, chiefly on confidentiality, exclusivity and costs.
Exclusivity means the seller will not negotiate with anyone else for a set period. It should be time-limited and only granted once price and structure are sufficiently clear, because from then on negotiating power shifts noticeably towards the buyer. How to compare offers with different payment components is a topic of its own.
Due diligence
In due diligence, the buyer and its advisers examine the company in detail. The financial review confirms the quality of earnings, the adjustments, net debt and working capital. The tax review looks for risks from past years. The legal review covers the corporate structure, material contracts, employment matters, intellectual property, permits and litigation. The commercial review focuses on the market, competition and customer relationships. Depending on the business, environmental, IT or HR reviews are added.
Documents are provided in a virtual data room, and questions and answers run through a structured list. Things that can be prepared well in advance include annual accounts and tax assessments, monthly figures and the plan, the articles of association and commercial register extract, the main customer, supplier, lease and loan agreements, managers' contracts, and overviews of staff, intellectual property, insurance and pending disputes. Known weaknesses are best raised early by the seller. Whatever the buyer finds alone costs trust and usually money too.
The purchase agreement
Share deal or asset deal
In a share deal, the buyer acquires the shares in the company. The company continues as a legal entity, and contracts, permits and employment relationships generally continue, unless contracts contain special change-of-control provisions. With the company, however, the buyer also takes on the risks of the past. In Germany, the transfer of GmbH shares, and even the obligation to transfer them, must be notarised (section 15(3) and (4) GmbHG). In Austria a notarial deed is required (section 76(2) of the Austrian GmbHG).
In an asset deal, the buyer takes over selected assets, contracts and rights. It can define more precisely what it acquires, but transferring contracts often requires the counterparties' consent. Where a business is transferred, employment relationships pass to the acquirer by law (section 613a BGB; in Austria section 3 AVRAG). In Germany, the employees concerned must be informed in text form beforehand and may object to the transfer within one month of receiving that information. Which form is suitable depends heavily on the tax consequences for both sides, which a tax adviser should assess.
Warranties and indemnities
In the purchase agreement, the seller gives assurances about certain features of the company, such as the accuracy of the annual accounts, the existence of material contracts or the absence of undisclosed litigation. If such a warranty turns out to be untrue, the seller must compensate the buyer under the terms of the contract. Limits are customary: minimum amounts below which no claims can be brought, an overall cap and specific limitation periods. Matters properly disclosed in the data room are often excluded from liability. Indemnities, by contrast, cover known, specific risks, such as taxes for periods before the sale. If such a risk materialises, the seller bears the cost. On the seller's side, the agreement should be negotiated by a lawyer experienced in transactions.
Signing and closing
When the agreement is signed, the contract is concluded. The shares, however, often only pass later, at closing, once agreed conditions are met: payment of the purchase price, consents from banks or key contract partners and, where required, merger clearance.
German merger control only applies above certain turnover thresholds. In the last financial year, the companies involved must have had combined worldwide turnover of more than €500 million, with one party achieving more than €50 million in Germany and another more than €17.5 million (section 35(1) GWB). A buyer without significant turnover of its own will generally not reach these levels; a larger corporate group may well do so. The transaction may not be completed before clearance (section 41(1) GWB). If the Federal Cartel Office wants to examine a merger in depth, it must say so within one month of receiving the complete notification. In the in-depth procedure, the merger is generally deemed cleared if no decision is issued within five months of the notification; extensions are possible (section 40 GWB). Austria has its own thresholds, including combined worldwide turnover of more than €300 million and combined domestic turnover of more than €30 million (section 9(1) KartG).
After closing
Closing marks the start of the transition. On day one, employees, customers and suppliers should hear first-hand what is changing and what is not. The seller often stays on for an agreed period, as an adviser or in management; the scope and end of that role belong in the contract. Depending on what was agreed, purchase price adjustments may follow, and the seller remains liable for as long as the warranties run.
Confidentiality during the sale
If a sale becomes known too early, it can unsettle employees, prompt customers to switch and hand competitors arguments. It has proven useful to keep the circle of insiders small, work with a project code name and hold meetings away from the premises. Where a competitor is among the interested parties, particularly sensitive information such as customer terms is disclosed late and only to a small group kept separate from day-to-day business. A coordinated statement should be ready in case something leaks. Key managers are usually brought in earlier, because buyers will want to meet them.
How long a sale takes
There is no fixed duration. Even a well-prepared process takes several months from first contact to closing. Incomplete documents, surprises in due diligence, uncertain buyer financing, protracted negotiations over warranties and regulatory approvals all extend it.
The role of advisers
An M&A adviser structures the process, prepares the documents, approaches buyers and leads the negotiations. The adviser is usually paid a retainer and a success fee. The success fee creates an incentive to close a deal that does not always coincide with the interest in the best terms, so the fee arrangement deserves careful thought. Lawyers and tax advisers support the contract and structure, and an auditor may help prepare the figures. The notary records the agreement. Under German law the notary does not represent either party but must serve all parties independently and impartially (section 14(1) BNotO).
This article is for general information only and does not replace legal, tax or financial advice on your specific situation.