Due Diligence, Contract Negotiation, Signing & Closing

1 Due Diligence: What to Expect as a Seller

Once the LOI is signed, due diligence (DD) begins: the buyer’s review of your company. The buyer and their advisors scrutinize your company before the purchase agreement is negotiated. Your role as the seller: provide documents, answer questions, and actively support the process.

The Three Core Areas: For Every Transaction

Regardless of the deal size, the buyer will examine at least these three areas:

• Financial DD: Annual financial statements, cash flow statements, EBITDA normalization, working capital, outstanding receivables and liabilities—do your numbers add up?

• Tax DD: Tax assessment notices, ongoing or pending tax audits, sales tax risks—are there any historical tax liabilities?

• Legal DD: Articles of incorporation, commercial register, key contracts (customers, suppliers, lease), employment contracts, legal disputes: Are there any legal pitfalls?

Small vs. Large Transactions

For small deals (under approximately €2 million), due diligence is more focused; the buyer primarily looks for deal breakers in the three core areas. For larger transactions, additional areas of review are added: commercial due diligence (market, customers), operational due diligence, IT/tech due diligence, ESG, or HR due diligence.

2 Preparation: Data Room and Documents

Well-prepared due diligence speeds up the process and demonstrates professionalism to the buyer. The more structured your preparatory work is, the fewer follow-up questions there will be and the faster the deal will close.

What You Need to Provide

• Annual financial statements (at least 3 years): Ideally prepared by a tax advisor, including the income statement, balance sheet, and notes to the financial statements

• Current trial balance and trial balance summary: The trial balance shows the current interim status, while the trial balance summary details all accounting accounts. Without them, the buyer has to guess whether the current year’s figures align with the annual financial statements

• Breakdown of your adjusted earnings: The buyer does not evaluate your reported earnings, but rather an EBITDA adjusted for one-time items and non-operating items. Provide this adjustment yourself and document it: one-time income and expenses, personal shares, and, above all, your own managing director’s salary, which is normalized to a market-standard level for a salaried successor. If you prepare this, you’ll be negotiating based on your own figures rather than the buyer’s

• Tax Assessments and Audits: The most recent tax assessments, reports from completed audits, and, if applicable, the status of any ongoing or announced audit. Concealing an ongoing audit won’t work—it will come to light during the tax due diligence (Tax DD)

• Key contracts: Customer, supplier, rental, and lease agreements. In addition to providing the contracts themselves, it can be helpful to create a summary table listing the contracting party, effective date, services and consideration, term, and notice period. Check each contract for change-of-control clauses—that is, termination rights in the event of a change in ownership

• Contracts with related parties: One of the most important audit points of all for owner-managed companies. This refers to agreements that differ from what you would have entered into with an unrelated third party: spouses or children on the payroll, rent for a property you own personally, or personal vehicles registered to the company. From a tax perspective, this constitutes a hidden distribution of profits and can lead to back taxes. Check with your tax advisor in advance to see if such cases exist, and disclose them transparently

• Bank and financing agreements: Loan agreements, including collateral such as guarantees, real estate liens, and transfers of ownership as security. In smaller companies, the owner often provides a personal guarantee. Clarify early on which collateral will be released upon the sale and when you will be personally released from liability

• Personnel: Contracts, an overview listing positions, salaries, length of service, notice periods, and special agreements

• Corporate documents: Articles of incorporation, extract from the commercial register, shareholder resolutions, and deeds of previous share transfers (chain of title)

• Permits, concessions, and licenses: All official permits your business requires. Important and often overlooked: Some permits are tied to you personally or your qualifications rather than to the company, such as registration in the trade registry, a restaurant license, or a permit under § 34c of the German Trade Regulation Act (GewO). Such permits are not automatically transferred to the buyer. Clarify this early on; otherwise, the deal could hit a roadblock that no contractual clause can resolve

• Intellectual Property (IP): Trademarks, domains, patents, and software licenses. They must belong to the business, not to you personally or to a third party (see Section 3)

• Insurance overview: Existing policies (public liability insurance, property insurance, etc.) with coverage amounts

Depending on the industry, there may be an additional area to review: If you have a production site or your own commercial property, you should expect questions regarding contaminated sites, soil contamination, and waste disposal (environmental due diligence). If your business model is fundamentally based on software or a platform, the buyer will also review the IT infrastructure.

Set up a digital data room: a secure cloud folder (e.g., through your advisor) with a clear folder structure. For direct sales without an advisor, a well-structured, password-protected cloud folder is sufficient. The folder structure should follow the due diligence (DD) categories: Finance, Taxes, Contracts, Employees, and Corporate Law.

During the review: Answer questions

Your work isn’t done once you’ve provided the documents. The real effort comes afterward, when the buyer’s advisors ask follow-up questions—and how you handle them shapes the impression the buyer forms of you.

• Centralize communication: Determine who will receive the questions, forward them to you, the tax advisor, or the attorney, and track their status. For small deals, this is usually you. Keep a simple list: question, person in charge, answered on, and where the answer is located. Otherwise, you’ll end up answering the same question three times and won’t know what’s still outstanding.

• Respond promptly and thoroughly: The buyer interprets long response times as a lack of interest or a sign that you’re holding something back. A brief message saying you’ll need two days is better than silence

• Bring up any known issues yourself: It’s better to proactively address known weaknesses rather than hope they go unnoticed. If the buyer discovers them on their own, you’ll also lose credibility for everything else you’ve said

• Stay focused on day-to-day business: An audit ties you up for weeks. If your numbers drop during this time because you’re solely focused on the sale, the buyer will ultimately negotiate based on worse figures than those for which they offered the price

3 Avoiding Red Flags

Buyers and their advisors actively look for warning signs. As a seller, you should know which findings could jeopardize your deal and address them upfront or disclose them transparently.

Financial Red Flags

• Inconsistent figures: The income statement, balance sheet, and tax returns don’t match up—this signals a lack of diligence or something worse

• Unexplained fluctuations: Sudden spikes in revenue or drops in margins without a clear explanation

• Undeclared Liabilities: Loans, guarantees, or pension commitments not listed on the balance sheet

• Inflated EBITDA: Costs shifted to other periods or revenue recognized early—this becomes apparent during normalization

Legal Red Flags

• Ongoing legal disputes: Especially those involving high amounts in dispute or claims for damages

• Change-of-control clauses: Key customer or lease agreements that can be terminated in the event of a change in ownership

• Missing Permits or Licenses: The company is operating without the required regulatory approval

• Unclear ownership structure (chain of title): The buyer must be able to trace, beyond a shadow of a doubt, who owns the shares. If shares were transferred in the past, procedural errors (e.g., lack of notarization) can render these transfers legally invalid—a deal-breaker. Therefore, check in advance whether all articles of incorporation, assignments, and commercial register entries are complete and in proper form.

• Unresolved IP Rights: Trademarks, domains, patents, or software licenses must clearly belong to the company, not to you personally or to a third party. Verify that trademarks are registered with the DPMA, that domains are registered to the company, and that no license agreements are about to expire. Any assets still held in your personal name or in the name of a third party (e.g., a domain or a trademark) should be transferred to the company before the transaction: this simplifies the deal and avoids disputes in the purchase agreement.

Tax Red Flags

• Ongoing tax audit: The tax authority is still conducting an audit and could demand back taxes

• Hidden profit distributions: Personal expenses charged to the company that were not properly accounted for for tax purposes

• Potential back taxes: Indications of tax liabilities that could weigh on the deal

4 Contract Negotiations: The Most Important Clauses

After due diligence, the purchase agreement (Share Purchase Agreement / Asset Purchase Agreement) is negotiated. As the seller, you should be familiar with the most important clauses: they determine your risk even after the sale.

Representations and Warranties

As the seller, you make representations in the purchase agreement regarding the condition of your business—for example, that the financial statements are accurate, there are no hidden debts, and all material contracts have been disclosed. You are liable for these representations.

Important limitations you should negotiate:

• Liability Cap: The maximum amount you must pay in the event of a breach of a representation or warranty. Typically, this ranges from 20–50% of the purchase price. Negotiate the lowest possible cap.

• Liability Threshold (Basket/De Minimis): Minor damages are not claimed; claims are only made once a minimum amount is reached (e.g., 1% of the purchase price). The higher this threshold, the better for you.

• Statute of limitations: Typically 12–24 months after closing; after that, the buyer can no longer assert warranty claims. Negotiate the shortest possible timeframes.

Indemnities

Specific indemnity clauses are agreed upon for known risks identified during due diligence. Example: If a tax audit is currently underway, you indemnify the buyer against any potential back taxes. Unlike warranties, indemnities often have no cap on the amount, so review them carefully.

Material Adverse Change (MAC Clause)

The MAC clause governs what happens if something material changes in your company between signing and closing (e.g., loss of a major customer, revenue decline > 20%). The buyer may then withdraw from the contract or demand an adjustment to the purchase price. As the seller, you should insist on the narrowest possible definition of what constitutes “material.”

Non-Compete Clause

You agree 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

5 Signing & Closing

Once the purchase agreement has been negotiated and finalized, the last two steps are: signing (signing the contract) and closing (the actual completion of the transaction).

Notarization

• 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. The notary reads the entire contract aloud, and both parties sign it.

• Asset Deal (Purchase of Individual Assets): Notarization is not mandatory, unless real estate or GmbH shares are included among the assets.

Closing Conditions

If the signing and closing do not take place at the same time, certain conditions (conditions precedent) must be fulfilled before closing:

• Buyer’s Financing Confirmation: This is often included as a closing condition, but it actually belongs earlier in the process: The bank’s firm commitment should be in place before you go to the notary. After all, payment won’t be made without financing anyway, and as a condition in the contract, it primarily serves as an exit clause for the buyer. It is therefore advisable to have proof of financing provided before signing; in practice, however, at the time of signing there is sometimes only a letter of intent for financing, and you bear the risk

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

• Third-Party Consent: If applicable, landlords, key customers, or suppliers (in the case of change-of-control clauses)

• Proper Management: You have continued to operate the company in the normal course of business

What happens on closing day?

On closing day, the transaction is finalized. The typical process:

• Signing of the contract: Notary appointment for a share deal; simple signature for an asset deal (provided signing and closing occur on the same day)

• Payment of the purchase price: The purchase price is usually transferred directly to you. An escrow account, if used at all, is only used for a small security deposit, which is held there for an agreed-upon period and released only afterward. For small transactions, a retention amount is usually not held in escrow at all, but is simply due at a later date

• Transfer of business documents: Accounting records, contracts, customer lists, employee files—both digital and in paper form (folders, original contracts, permits)

• Handover report: Documents the condition of the business at the time of handover; signed by both parties

• Transfer of access rights and powers of attorney: IT systems, bank accounts, business premises, keys

Asset Deal: Transfer of business operations pursuant to Section 613a of the German Civil Code (BGB)

If you sell individual assets instead of company shares (asset deal), the employment relationships are transferred to the buyer by operation of law. The seller and buyer must notify the affected employees in writing prior to the transfer regarding the timing and reason for the transfer, the legal and economic consequences, and planned measures. The one-month objection period begins only upon receipt of this notice. If the notice is incomplete or fails to be provided, the period does not begin, and an employee may still object to the transfer months later: in that case, their employment relationship remains with you. Therefore, plan the notification together with the buyer and have the text reviewed by an attorney. In a share deal, this issue does not arise: the company remains the employer, and the employees simply gain a new shareholder.

Communication After Closing

Plan early on who will be informed of the sale and when: Employees, customers, and partners should not hear about it from third parties. Coordinate with the buyer to develop a joint communication plan. You’ll learn how to structure the handover and communication in detail in the next module.