In addition to the question of the appropriate amount of the purchase price or the type of sale, as a share deal or as an asset deal, many more details are on the agenda of the buyers. The seller, on the other hand, is usually only interested in the amount of the purchase price and the most advantageous taxation of the resulting profit. Contractual modalities for the sale of the company can have both far-reaching effects on the purchase price actually payable and on the assumption of guarantees, warranty rights and personal liability risks by the seller. After all, it is in the interest of the buyer to transfer as many risks as possible associated with the company sale to the seller. But also a usually time-limited support of the company by the seller in the context of stay clauses are conceivable contractual modalities in a company sale. This is especially useful if the future fortunes of the company depend essentially on the expertise of the seller.

Contractual modalities for the sale of companies – Introduction

For many entrepreneurs, selling their business is a significant cut in their lives. This is especially true if they have founded and built their own company. At first glance, founders of startups may seem a little more relaxed, because they have targeted the exit anyway from the beginning. In addition, the acquisition of investors in any case dilutes their own shares, so that their value falls relative to the situation at the time of establishment. But even there, the attachment to the company, which was navigated with much diligence and courage through the waters of business activities to economic success, is often considerable.

Be that as it may, now the company should change ownership. Finding a potential buyer who agrees with the targeted purchase price may take a short or long time, we want to assume that this will actually succeed, as in most cases. But if you are facing the sale of your own company for the first time in your life, you often face an immense number of demands from buyers during sales negotiations. Of course, buyers want to cement these unforeseen conditions into a contractual arrangement. No wonder, then, if such an inexperienced seller should suspect more than just a few risks. Because such contractual modalities in the company sale can induce far-reaching consequences.

This is why contractual modalities are important in the company sale

But you also have to protect the buyer side of a company sale. Of course, a buyer also has to prevent certain risks when buying a company. Ergo, these must become part of the company purchase contract. The more precise the design of the claims of the buyers to the sellers in the purchase contract, the lower the risk that there will be unwanted surprises in a possible legal dispute. The fact that buyers primarily want to incorporate their own advantages into the company purchase contract is more than understandable.

Who specifies contractual modalities for the company sale?

Thus, it is in particular the company buyers who specify contractual modalities for the company sale. Because the especially inexperienced seller should interest in the first place only the purchase price. However, other reasons often play an important role in this imbalance.

Because larger companies usually take over smaller ones, the takeover of the beverage delivery service Flaschenpost may serve as an example here, they usually have the correspondingly greater experience in this regard. If the purchasing companies are of a certain size, they may also have their own departments that deal exclusively with mergers and acquisitions. No wonder, then, if they are technically far beyond the experience horizon of a simple entrepreneur in the drafting of company purchase contracts. They are then also the ones who decisively control the company sale upon successful completion of a due diligence audit. Therefore, contractual modalities are often primarily included in the sales contract by the company buyers.

If a seller had an equally comprehensive horizon with regard to possible contingencies that could occur in his company sale, then in general, significantly more claims that are supposed to protect the interests of a seller would probably be included in a sales contract. But the reality is different. At the very least, the buyer’s proposal for the company purchase agreement provides the seller with an opportunity to think about both the adequacy of the buyer’s ideas and the possibly own lack thereof. In any case, a hasty signature under the first draft of the purchase contract is rarely a good decision. Because ultimately it depends on the contractual modalities for the implementation of a company purchase, less on an often deceptive gut feeling (or rather its lack). This is not about avoiding a fraudulent deception, nor about overly critical doubts as to whether a company sale in itself makes sense. At least the latter point should be clearly clarified by this time.

4. The main contractual modalities in the business sale

Let’s now go into detail and see what contractual modalities a seller might have when buying a company. This is a selection of the most important regulations that can typically arise in such a situation.

4.1. Arrangements for payment of the purchase price

Even the first point should surprise some sellers. Because buyers often have an interest in designing the time and the extent of the payment of the purchase price. On the one hand, they improve their liquidity because, for example, they can achieve better conditions with lenders by deferring payments. On the other hand, they also enjoy greater financial freedom themselves. Of course, contractual modalities for the company sale with regard to the payment volume and payment time for buyers also have a direct connection to the purchase process. Because if a dispute arises from other legal transactions stipulated in the contract, then you are better off in the negotiations if you have held the purchase price for the time being. This would also benefit the buyer’s liquidity. In addition, the withholding of the payment also seems useful if audits of the tax office are still pending and it is therefore unknown to what extent any subsequent tax payments could subsequently affect the originally negotiated purchase price.

4.2 Assumption of guarantees and warranties

This brings us to the second aspect, namely the assumption of guarantees, warranties and private liability by the seller. For certain risks, which can arise in particular shortly after the transfer of the company to the buyer, the buyer is likely to have an interest that the seller bears them. For example, a tax repayment due to an external audit by the tax office can also be avoided by a payment obligation on the part of the seller. But also guarantees that transactions concluded under the management of the seller with customers or suppliers, in particular those that are essential for the company, are actually fulfilled, can be the subject of contractual modalities in the company sale.

On the other hand, buyers often require sellers to guarantee the equity ratio existing at the time the purchase agreement is signed. But even beyond the date of sale, guarantees on the equity ratio can influence the company sale as contractual modalities. This represents a considerable risk for the seller, because the buyer could manipulate the equity ratio by clever management in such a way that the purchase price ultimately shrinks significantly in accordance with the contract. In such a case, the buyer could unfairly claim back a large part of the purchase price quite legally.

4.3 Stay clauses for Managing Directors

Another instrument with which buyers can influence the purchase process involves the seller in the company beyond the company sale. Because in some cases, a stay of the seller for the company is more than just meaningful. If the company is based on the knowledge and know-how of the founder, then a future livelihood without his expertise is hardly conceivable. For this reason, contractual modalities for the sale of the company occasionally contain sticking clauses that regulate the continued cooperation of the seller in different ways. For example, this can be done under a consultant contract or a temporary employment contract. No wonder, then, that this regulation is often used for the exit of innovative startups. But this also has the advantage that the new management receives better familiarization and integration into the acquired company.

4.4. Assumption of liability of the seller for previous loans

Contractual modalities for the acquisition of the company may also exist with regard to the assumption of the liability risk for loans already existing at the time of the sale. Here, too, there is an interest of the buyer to minimize this risk contractually. So the buyer often asks the seller to assume personal liability for this risk. By the way, this also applies if the seller is a holding company. Then the wish to assume the liability risk falls on the indirect or direct shareholder of the holding company. Here, too, it makes sense to consider whether this represents an acceptable risk or whether it makes it possible to improperly apply the provisions of the sales contract.

Contractual modalities for the company sale – Conclusion

So we can generalize that contractual modalities in the company sale often have significant implications that affect the seller. For this, sellers should be best prepared right at the beginning of the sales negotiations. After all, the demands of potential buyers are sometimes more than just perfectly understandable reasons to avoid possible buyer risks. It is already advantageous to have an experienced support in the area of mergers & acquisitions at the side of the sales negotiations, because it develops a better understanding of the legally flawless formulation of the often very extensive company purchase contracts. Therefore, in many cases, advice on the company sale is indispensable.