Engineering office - Purchase and sale in Germany
Purchase agreement, purchase price and valuation of an engineering company under german law
The engineer who intends to sell his engineering office or an interest in his engineering office should allow adequate preparation time. This applies to engineering offices with well-known major clients as well as to engineering offices that have a focus on smaller and medium-sized clients in Germany. In the sales process, the buyer and seller have conflicting interests in terms of purchase price, warranties and liability risks. Both sides have many financial, tax and legal circumstances to consider throughout the purchase process in german practice.
Our law firm, specialized in german business law with corporate lawyers and tax advisors, advises engineers on the purchase and sale of planning and engineering companies from a legal and tax perspective.
For a non-binding inquiry, please contact one of our experts directly by phone or email or use the contact form at the bottom of this page.
Our know-how in the purchase and sale of engineering companies in german practice
Our team of business lawyers and certified specialists for german corporate law has many years of practical experience in the purchase and sale of planning offices and professional practices. Our lawyers support engineers in Germany within their preparations for sale, in the drafting of contracts and in the negotiation of purchase agreements. Our range of services includes the following aspects in particular:
- Preparation of the sale of the entire engineering practice (sole proprietorship, GmbH, GmbH & Co. KG, PartG, GbR)
- Support of the buyer in the takeover of an engineering office or a share in a GmbH, GmbH & Co. KG, PartG or GbR
- Support of the shareholder when leaving his company
- Preparation and negotiation when the engineer acquires shares and joins a company
- Valuation of engineering offices and company participations (company valuation) as well as the tax structuring of planning office takeovers
- Optimization of partnership agreements in engineering companies
- Management of shareholder disputes in engineering companies (GmbH, GmbH & Co. KG, PartG, GbR) and preparation of contentious shareholder meetings
Valuation of an engineering company under german law
The valuation of an engineering office depends on many value-determining factors. In german practice, the business equipment of the engineering office often plays a subordinate role in the valuation, whereas the staff is of valuation relevance, especially in the case of larger offices. The decisive factors in the valuation of the engineering office in german practice are the value of the customer contacts and the future earnings volume of the engineering office. The value of the engineering office is therefore largely determined by the customer base, which represents an intangible asset. From a functional point of view, the possibility of continuing customer relationships and sales in the future is therefore an essential factor for the company valuation. In this context, the successful transfer of the customer relationship is easier to implement as part of a longer-term plan than a short-term takeover of the german engineering firm.
The correct valuation of an engineering office or a share in an engineering office in Germany must always be distinguished from the successful negotiation of the purchase price. This can be well explained by the following example: If an engineering office has to be sold due to an illness, occupational disability or even the death of the engineer, general experience shows that the amount of the purchase price will be much lower than if the sale of the engineering office was prepared in a professional manner. It is a general rule in german practice that the selling engineer usually has to accept discounts compared to the "true value" of the engineering office if he tries to sell the engineering office very quickly. The preparation time and the negotiation skills represent the two essential success factors in the sales process.
Evaluation from our expert!
In our team, tax advisor Martin Stürmer takes care of the company valuation for the determination of the purchase price. As a specialized expert, he works together with our lawyers in german corporate law. You can also engage him independently of a legal mandate.
Ask for a quote for a business valuation or a cost-effective indicative business valuation:
Valuation procedure for german engineering offices
In a valuation of an engineering office in Germany, the consideration of business evaluations, annual surpluses as well as the tax documents of the engineering office of the last three years are of high relevance.
In german practice, many approaches to the valuation of engineering offices have become established. Lump-sum valuation approaches are used, which, for example, are based on the annual turnover. The investment-theoretical valuation approaches, on the other hand, are based on the capitalized earnings method (e.g. IDW S1 method), which best reflects the goodwill of the engineering firm, including the intangible asset customer base. The capitalized earnings value method determines what income the engineering firm will generate for the owner over the course of the next few years. The expected future earnings of the german engineering firm are discounted to the present. When assessing the appropriate purchase price, the buyer must consider the question of when the purchase price will pay for itself with the projected earnings and when the so-called return on investment will be achieved.
Regardless of whether a german sole proprietorship or an engineering company, such as a GmbH, GmbH & Co. KG, partnership company or GbR, the turnover, cost structure and the question of open orders and receivables are always very important for the buyer. When evaluating the engineering company in Germany, the return on sales as well as the composition of the customer base is very meaningful.
Legal format for the takeover of the engineering office in Germany
From a contractual point of view, the german engineering office can be transferred on the one hand by transferring individual assets, the so-called asset deal. If, on the other hand, the german engineering office is organized in the form of a company (GmbH, GmbH & Co. KG, partnership company or GbR), the engineering office can also be transferred to the buyer by way of a so-called share deal. A share deal is a transfer of shares in a company in which a shareholder transfers his shareholding to one or more buyers. Both legal forms of transfer of the engineering office - asset deal or share deal - are legally structured differently and may have different tax consequences under german law, especially for the buyer of the engineering office.
Guideline for the purchase agreement of an engineering office under german law
If the buyer intends to purchase a larger company in Germany, he will conduct a so-called due diligence in advance. During the due diligence process, all existing risks and opportunities should be made visible to the buyer. Such a due diligence procedure is particularly suitable for the purchase of a larger engineering company.
The following aspects should be considered when drafting and negotiating a purchase agreement under german law. Some of the following subjects of regulation have a high priority for the buyer and seller:
- The purchase agreement in german practice must fully identify the individual assets, inventory, and fixtures sold with the business. Usually, they are summarized in an inventory list, which is taken as an annex to the purchase agreement.
- All relevant asset relationships and contractual relationships of the engineering company must be recorded and delimited in german practice. This applies in particular to continuing obligations, such as rental and license agreements, which are transferred to the buyer. The purchase agreement in Germany must have a clear provision regarding the semi-finished work, receivables and the liabilities of the engineering office. Usually, a closing date with a clear delimitation of risks must also be formulated.
- It is also mandatory to include all employment contracts and service contracts in the purchase agreement. In principle, a transfer of the engineering office constitutes a so-called transfer of business from the point of view of german labor law. Incorrect handling of the documentation required under german civil law can result in far-reaching risks for the buyer and seller.
- If the buyer wants to take over the company name of the engineering office, it must be legally examined whether the company name can be continued by a third party. In the case of a takeover of a partnership, strict requirements may arise under german company law.
- In the case of an asset deal or the takeover of partnership shares, a contractually fixed allocation of the purchase price to the assets taken over by the purchaser may prove useful. This can have an influence on the tax-relevant depreciation of the purchase price under german tax law.
- The subject matter of a purchase agreement in Germany is usually a warranty catalog and clear purchase price provisions. Lack of clarity in these important areas of regulation often leads to disputes after the purchase of the company. Uncomplicated is the regulation of a fixed purchase price. However, a variable purchase price is also conceivable in german practice - often in the interest of both parties. For example, subsequent circumstances after the effective date chosen by the parties can lead to an agreed purchase price increase or reduction (e.g. earn-out arrangements).
- The assumption of the lease can play an important role if the engineering office premises are rented. If the buyer wants to take over the premises from the seller, the landlord must be included in the sales process or appropriate security mechanisms must be included in the purchase agreement in favor of the buyer.
- In the case of purchase agreements concerning engineering offices in Germany, the provisions of non-competition clauses and customer protection clauses are of great relevance. The buyer must be protected against paying a high purchase price and the seller subsequently devaluing the sold engineering office by taking up his engineering activities.
For every purchase agreement in german practice, also for an asset deal or the sale of shares in partnerships, it should be checked whether the purchase agreement requires notarial certification in Germany. If statutory formal requirements are not observed, this will lead to the nullity of the entire purchase agreement. A void contract of sale can lead to existential risks for both the buyer and the seller.
Taxes and depreciation possibilities with the engineer's office purchase under german tax law
From a german tax perspective, the buyer and seller face different questions. The seller is interested in how the purchase price accruing to him from the sale of the engineering office is taxed. The situation on the buyer's side, on the other hand, is more complex. The buyer, on the other hand, is interested in how the taxation of his current profit can be reduced by the possible depreciation of the purchase price paid by him. Thus, the buyer must carefully consider how the depreciation will affect the future tax burden under german law. Such a possibility of depreciation exists if the engineering office takes place in the form of an asset deal or through the acquisition of partnership shares. In this case, the purchase price payable by the buyer can be depreciated (AfA). If the purchase of the engineering office in Germany is debt-financed as part of a bank loan, depreciation generates liquidity for the buyer, which it can use to repay its bank loan.
An overview of depreciation and tax effects on the part of the buyer of a freelance engineering practice in Germany can be found here (following soon).
If you have any legal or tax questions regarding the acquisition or sale of a planning or engineering office in Germany, please do not hesitate to contact our business lawyers in our offices in Hamburg, Berlin, Cologne, Munich or Frankfurt a.M.