Even though the COVID-19 crisis has left its mark in many ways, quite a few companies have weathered the pandemic quite well thanks to their versatility, agility, and responsible corporate culture and policies.
It is precisely at this point, however, that clients—particularly those from the SME sector—often ask whether legal and tax details already play a role, or whether such nuances should not be clarified until the purchase agreement is drafted. Often, the unspoken question of the costs associated with legal and tax advice plays a role in the background. Given the considerable complexity of both subject areas and the resulting opportunity costs, this concern should be quickly addressed.
What tax details need to be considered in business succession planning?
German tax law is one of the most complicated in the world, and the tax treatment of business transactions is, in turn, one of its most specialized areas. It is therefore advisable to work with specialists who are well-versed in this subject matter.
It is clear from the outset that the sale of a business by a private seller is subject to taxation. However, many factors can significantly alter the tax burden. The legal form of the business plays just as much a role here as the seller’s age. Have other businesses been sold, or are they currently being sold? What is the seller’s overall tax burden, and what timeframe has been chosen for the sale of the business?
In addition, the family situation plays a major role if the transfer of assets within the family must be taken into account from the very beginning. Any existing pension commitments on the part of the company being sold may also need to be separated from the company in a tax-efficient manner.
There are therefore many factors to consider, and managing them is highly complex. At the same time, the potential for optimization is enormous if the tax details are taken into account from the very beginning of the transaction.
Are legal details important in business succession?
During sale negotiations, both parties involved are often in agreement and working toward a common goal. Nevertheless, it’s important to always keep in mind that a purchase agreement not only specifies the purchase price and its payment terms but also requires both parties to describe the background of the transaction, including mutual guarantees. Should disputes arise between the parties at a later date, the purchase agreement—together with the documents made available in the data room—serves as the essential basis for resolution.
Therefore, when it comes to legal transaction advisory services, it is advisable to work with a law firm that already has extensive expertise in this field. Knowledge of current standards for purchase agreements significantly speeds up contract negotiations while ensuring clear terms. Mutual warranties, in particular, entail long-term liability for both sides and should therefore be formulated with precision, both in terms of content and legal language. The worst-case scenario in a company sale is the subsequent cancellation and reversal of the entire transaction—an outcome that would leave none of the parties involved truly satisfied. While standard contracts available online are quick and inexpensive to obtain, they never account for the specific needs of the company in question or the underlying circumstances. For this reason, the use of such standard contracts in business sales is clearly not recommended.
Conclusion: Legal and tax details in business sales should be drafted by experts
As negotiations for a business sale intensify, the involvement of the appropriate specialists becomes increasingly important. All major M&A advisory firms, such as EUROOCNSIL, therefore collaborate nationwide with a number of renowned law and tax firms to offer their clients the best possible support. When selecting the appropriate firms for the transaction, care should be taken to ensure that their expertise aligns with the transaction and, of course, that the clients and the firms are a good fit both professionally and personally.
