Many succession projects fail during the negotiation phase. What steps should be taken to ensure that the sale negotiations are successfully concluded?

In the previous two newsletters, we explained company successions in general and the preparation process, as well as finding potential buyers. Now, we turn to the contract negotiations. As a business owner, you have built or developed a company that you are proud of. You have now found a buyer or buyers, or several interested parties, who are showing strong interest.

If the sale is to take place to children or other close family members, who will receive the business on preferential terms, different questions arise. How can the transfer be made in a way that no one is advantaged or feels disadvantaged? What is the fair price so that all siblings can inherit equally? In more complex situations, it makes sense to form a family council that meets several times. Here too, it is important to show how the company is being valued. Often, a marriage and/or inheritance contract needs to regulate whether and how values should be accounted for in an inheritance. Should the younger or undecided children be given an option to join the business later on? Should the retiring generation retain some shares so that their connection to the family business can continue? What contingency plans are in place if the successor is unable to continue due to death or illness, so that the company remains in the family? Both parties face comprehensive issues and future obligations. Good communication and asking the right questions are essential to ensure that the right agreements are ultimately concluded.

But selling to third parties, management, investors, or competitors is also complex. First and foremost, there must be agreement on the sale price. Typically, the buyer is required to submit a purchase offer. In some cases, this is initially formulated as a price range or depending on financial indicators. Should assets be distributed in advance to lighten the company, or are only the assets being acquired and not the company itself? In this phase, it is worthwhile to have comprehensive discussions with the right decision-makers and advisors. The sellers have another opportunity to highlight the advantages of the company. Where are the unactivated values of society? Buyers know that they are taking on many risks. It is uncertain how the market and employees will react to the ownership change. The detailed company presentation mentioned earlier, which documents the advantages of the company, is also important for this process. If new advisors appear on the buyer’s side during this process, they must also be convinced of the purchase price. Key points must be defined during discussions, which will then be incorporated into the purchase agreement:

1. Actual purchase price, substance withdrawals, purchase price model (e.g., based on working capital), possibly earn-out model
2. Withdrawals of non-operating assets, real estate, etc.
3. Transfer of benefits and losses, timing of dividend entitlement
4. Refinancings, repayment of shareholder loans
5. Work planning and remuneration of the existing employee shareholders
6. Detailed buyer information, purchasing company, financing, financing commitment
7. Scope of the planned due diligence
8. Which warranties is the seller willing to provide?
9. Important contract changes of the company, especially due to ownership clauses
10. Disclosure of significant existing risks, legal disputes, liability cases
11. Timeline of contract signing, contract execution, payment, transfer timing, who assumes which tasks and costs
12. Post-transaction support, consulting agreement, non-competition clause
13. Tax reservations and clarifications
14. Confidentiality, communication with employees, customers, public

We recommend addressing all of these topics as early as possible so that they can be included in the purchase agreement. It is not uncommon for purchase negotiations to fail because parties cannot reach an agreement on unavoidable minor issues that were raised too late, or the buyer loses trust.

In general, it is advisable to sell the entire company at once. Otherwise, a shareholder agreement is indispensable.

If there are subsequent purchase price adjustments through earn-out models, we recommend defining them for no longer than three years.

We have experienced that the smaller the company, the closer the contract signing and contract execution tend to be. However, we recommend deliberately separating these dates to allow sufficient time for the preparation of the transfer.

Throughout the negotiations, it's not just about numbers, law, and taxes, but also many emotional moments with ups and downs. A wrong word at the wrong time can bring the process to a standstill. We are happy to support you with our expertise in the succession process and guarantee to ask the right questions in the right way.

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