Contract Negotiation, Signing, and Closing

1 From the LOI to the Purchase Agreement

After due diligence, the contract phase begins. The due diligence findings are incorporated into the purchase agreement—and this is where the terms become binding. The LOI (Letter of Intent) served as a framework; the purchase agreement contains the binding details.

Advisors vs. Direct Sale

• With an advisor (advisor-assisted deal): Lawyers for both sides negotiate the SPA (Share Purchase Agreement) for a share purchase or the APA (Asset Purchase Agreement) for the purchase of individual assets (e.g., machinery, brand, etc.). The M&A advisor coordinates the process.

• Direct sale (< €2 million): Often a simpler contract—but an M&A-experienced attorney is still required. Even in small deals, incorrect clauses (or missing clauses) can prove costly.

When does the contract phase begin?

Once the initial due diligence phase is complete and no deal-breakers have been identified, the contract phase begins—possibly before due diligence is fully completed. However, any findings discovered later are, of course, incorporated into the draft contracts, and the contracts are finalized and signed only after due diligence is fully completed. For smaller transactions, the contract phase lasts approximately 2 to 4 weeks; it may take longer for larger deals.

2 The Most Important Contract Clauses

A purchase agreement for a business transaction contains numerous clauses. As the buyer, you should make sure you fully understand the following ones—they determine your risk and your rights.

Purchase Price & Payment Terms

The purchase price can be structured in various ways—usually as a combination of several elements:

• Upfront Payment: A portion of the purchase price paid at closing

• Installment payments: Portions of the purchase price paid in installments over a defined period

• Earn-out: A portion of the purchase price is tied to future performance targets (e.g., revenue, EBITDA)

• Seller loan: The seller provides a portion of the purchase price as a loan—to be repaid like a loan

Representations & Warranties

In the purchase agreement, the seller makes representations regarding the condition of the business. Typical representations:

• Accuracy of the annual financial statements and financial data

• No hidden liabilities or debts

• Compliance with all legal requirements

• No pending legal disputes (or disclosure of all known disputes)

• Completeness of the documents provided in the data room

Important Limitations on the Warranties:

• Liability cap: Maximum amount the seller must pay in the event of a breach of warranty—typically 20–50% of the purchase price

• Liability floor (basket/de minimis): Minor damages are not claimed—claims can only be made starting at a minimum amount (e.g., 1% of the purchase price)

• Statute of limitations: Typically 12–24 months after closing—after that, warranty claims can no longer be asserted

Indemnities

Specific indemnity clauses are agreed upon for known risks identified during due diligence. Example: If an outstanding tax risk was identified during tax due diligence, the seller indemnifies the buyer against any potential back taxes.

Non-Compete

The seller agrees not to establish a competing business or work for a competitor after the sale.

• Typical duration: 1–2 years after closing

• Geographical scope: Regional or national—must be reasonable and specific (otherwise invalid)

• Subject-Matter Limitation: Limited solely to the industry of the sold company—must be very clearly defined in the SPA to avoid room for interpretation

Transition Period

The seller remains available for a defined period after closing to assist with the handover:

• Small deals: Often 3–6 months, partly unpaid (as part of the purchase price), partly as a separate consulting agreement

• Larger deals: A formal Transition Services Agreement (TSA) with clearly defined services and compensation

• Important: Define specific tasks and availability in the contract—not just “the seller will be available”

Material Adverse Change (MAC Clause)

What happens if something material changes between the signing of the contract and closing? The MAC clause governs:

• What constitutes a “material adverse change” (e.g., loss of a major customer, revenue decline > 20%)

• What rights the buyer has (withdrawal from the contract or adjustment of the purchase price)

• Timeframe: Applies from the date the contract is signed until the closing date

3 Notary appointment, also known as "signing" (for share deals)

Once the purchase agreement has been negotiated and finalized, the signing —the formal signing of the contract—takes place. In the case of a share deal (purchase of GmbH shares), notarization is required by law (Section 15 of the German Limited Liability Companies Act (GmbHG)). Without a notary, the purchase is invalid.

What happens at the notary appointment?

• Reading of the purchase agreement: The notary reads the entire agreement aloud—this is required by law and can take several hours for lengthy agreements

• Final questions and clarifications: Both parties may ask the notary questions. Minor editorial adjustments are still possible

• Signature: The buyer and seller (or their authorized representatives) sign the purchase agreement in the presence of the notary

• Notarization: The notary notarizes the contract—from this moment on, the contract is legally binding

What about asset deals?

In the case of an asset deal (purchase of individual assets), notarization is not mandatory —unless the assets include real estate or shares in a GmbH. Asset deals are therefore often concluded by private agreement. In such cases, the signing and closing may also take place simultaneously.

4 Prepare for the closing

After the signing, the period leading up to closing begins—the day on which the transaction is actually completed: the shares are transferred and the purchase price is paid. Before that, all closing conditions must be met.

Closing Conditions (Conditions Precedent)

Before closing can take place, certain conditions defined in the purchase agreement must be met. These so-called conditions precedent (CP) protect both parties—especially you as the buyer. Only once all CPs have been met will the purchase price be paid and the transfer completed.

Possible Closing Conditions for Small Deals:

• Submission of current annual financial statements / business analysis: The seller must provide current financial figures that confirm the basis for the valuation

• No Material Adverse Change (MAC): The company’s financial condition must not have deteriorated materially between the signing of the contract and closing

• Financing confirmation: Your bank financing must be finally confirmed and ready for disbursement

• Regulatory approvals: If required, e.g., antitrust review—this is mandatory only above certain revenue thresholds (including when both companies combined generate > €500 million in global revenue). Therefore irrelevant for small deals, with the exception of certain industry-specific approvals

• Third-Party Consent: Landlords (assumption of lease agreements), key customers or suppliers (in the case of change-of-control clauses), and, if applicable, shareholders

• Key personnel secured: Key employees have signed new employment contracts, or the seller has agreed to a transition arrangement

• No pending legal disputes: Confirmation that no new lawsuits or proceedings are pending against the company

• Proper management: The seller has continued to operate the company in the normal course of business between signing and closing (no extraordinary expenses, no new debt)

Checklist: Preparing for the Closing

5 Closing Day

On closing day, the transaction is completed. The process depends on whether it is a share deal or an asset deal—but the basic steps are similar.

The Process of a Typical Closing Day

1. Notary appointment (share deal) or contract signing (asset deal) —For GmbH shares, notarization is mandatory. The notary reads the contract aloud, and both parties sign it.

2. Payment of the purchase price – For small transactions, the purchase price is usually transferred directly to the seller. An escrow account, if used at all, is only used for a small security deposit, which remains there for an agreed-upon period.

3. Handover of business documents —accounting records, contracts, customer lists, supplier contracts, employee files

4. Signing the handover report – Documents the condition of the business at the time of handover and what was transferred

5. Transfer of access rights and powers of attorney – IT systems, bank accounts, business premises, vehicles

After Closing

The transaction is complete upon signing—but the work has only just begun. The most important steps immediately following closing:

• Registration with the Commercial Register (Share Deal) —The notary registers the change in shareholders with the Commercial Register

• Inform employees – In person and promptly. Ideally, employees should learn about the change in ownership from both you and the seller together

• Notify customers and suppliers —Contact key business partners in person; notify others in writing

• Review insurance policies and contracts – If contracts were held in the seller’s personal name rather than in the company’s name, they must be transferred to your name or renewed

• Update bank accounts and powers of attorney – Set up new signing authorizations and remove old ones