Purchase price of a GmbH & Co. KG in german practice
Company valuation, purchase price clauses and taxation in Germany
The GmbH & Co. KG is a frequently chosen form of company, especially among german medium-sized and family-owned businesses. To ensure that negotiations do not fail when selling a GmbH & Co. KG, the structuring of the purchase price often plays a decisive role. Since buyers and sellers pursue different interests, various factors must be taken into account. The essential basis of the purchase price negotiations is the company valuation.
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Legal expertise in german company acquisitions and company valuations
Our team of lawyers, certified specialists for corporate law and tax advisors has many years of experience in M&A measures and company acquisitions. Our consulting framework includes the following areas:
- Due diligence in the case of takeovers of GmbH & Co. KGs and participations in companies
- Planning and management of the GmbH & Co. KG acquisition in Germany and share sale process
- Company valuation and share valuation
- Drafting of company purchase agreements (SPA) and asset deal purchase agreements on the buyer and seller side
- Tax support during the purchase and sale of a company
Procedure of the purchase of a GmbH & Co. KG in Germany
Every company sale usually follows a similar pattern. The following steps are crucial:
- Declarations of the parties in advance in a so-called Letter of Intent (LoI).
- Due diligence of the buyer to examine the GmbH & Co. KG
- Determination of whether the company purchase will be organized as an asset deal or share deal
- Drafting of the company purchase agreement and initial purchase price negotiations based on the due diligence review and company valuation
- Conclusion of the purchase agreement by notarial certification
- Completion of the purchase agreement through fulfillment of the closing conditions (closing)
The description of a complete procedure for the purchase / sale of a GmbH & Co. KG can be found here: Purchasing a GmbH & Co. KG in Germany - this is how it works / Sale of a GmbH & Co. KG or a limited partner's share (following soon)
Company valuation as the basis for purchase price negotiations in german practice
The starting point and basis of the purchase price negotiations in Germany is the company valuation. This is determined on the basis of the results of the buyer's due diligence as well as the target company's annual financial statements and other internal accounting. Since the balance sheet results are of great importance in the entire german sales process, it is customary for the buyer to obtain a no-fault guarantee for their accuracy from the seller. So-called balance sheet guarantees play a major role here, which in german practice can also give rise to a high liability potential for the seller side. The subsequent valuation can be carried out by different methods. The parties involved decide for themselves which method is suitable for the specific sale of the company, depending on their objectives and interests. Relevant for the sale of a GmbH & Co. KG in Germany are the capitalized earnings value method in accordance with the IDW S1 standards of the Institute of Public Auditors in Germany (Institut für Wirtschaftsprüfer), the discounted cash flow method and the multiples method.
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.
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How do the enterprise value methods differ from each other?
- In the capitalized earnings value method, the company's revenue surpluses are discounted as a basis on a valuation date. This method is particularly well suited for small and medium-sized companies that are not represented on the german capital market.
- The so-called discounted cash flow method, on the other hand, refers to the sum of the discounted cash flows which are to flow from the company to the company owners in the course of a long-term plan.
- The multiples method also plays a role in determining the enterprise value of small and medium-sized german companies because of its ease of use. The method is based on the assumption that companies with similar key figures and attributes are also to be valued similarly. The enterprise value is therefore calculated by multiplying the key figures of the target company by the relevant current and future key figures (multiples) of comparable companies. In addition to individual quantity figures, such as customer numbers, all relevant reference figures, in particular sales, EBIT or EBITDA, can be considered as multipliers. It should be noted, however, that the multiples method is based on a market comparison and should therefore only be used for larger german companies as a supplement to the earnings-based valuation methods due to the lower accuracy of the results.
Purchase price structuring: what purchase price clauses do exist in german practice?
Based on the company valuation, the goal of the negotiations is to reach an agreement on a specific purchase price. In doing so, all price-forming factors must be taken into account. Factors such as the market and industry environment, the tax situation of the parties, the performance and retention of the previous management, as well as possible ancillary services (e.g. notary fees, real estate transfer tax, consulting fees, etc.) can influence the price in german practice. Different ways of structuring the purchase price and the payment of the purchase price make it possible to take these factors into account.
One possibility is to agree on a fixed purchase price. This may seem unproblematic at first, but since not all the relevant data is available at the time of the purchase price negotiations, there is usually a need to adjust the purchase price at a later date. In this case, a preliminary purchase price is agreed between the parties, supplemented by so-called purchase price adjustment clauses. For the precise drafting of the clauses, one of the following models is usually used in german practice:
Common mechanisms for purchase price adjustment clauses under german law
One possibility is to determine the final purchase price on the basis of the target company's settlement balance sheet, which is to be prepared as of an agreed transition date. In doing so, it is permissible to deviate from the accounting rules of Sections 238 et seq. German Commercial Code (HGB). For german small and medium-sized companies in particular, this rule is therefore often easy to implement and is frequently applied.
In contrast, for larger corporate transactions, the adjustment of the purchase price according to the "cash free - debt free" principle is particularly practicable. In order to compensate for different liquidity and financing situations, the company is placed in such a position for the purchase price calculation as if it had neither external liabilities ("debt free") nor cash ("cash free").
On the other hand, agreeing on a variable purchase price can help if the buyer and seller have completely different ideas about the purchase price. In german practice, with the help of so-called earn-out clauses, the parties in this case agree on a fixed base price on the one hand and a variable purchase price portion on the other. The variable part of the purchase price then becomes due when the agreed performance targets of the sold company are achieved. If an earn-out clause is agreed, the parties must determine an individually appropriate period (earn-out period) and the relevant key performance indicators (earn-out performance indicators). The key performance indicators to be determined by the parties can be financial factors, such as cash flow or sales, on the one hand, or individual success criteria, such as the market launch of a new product or successfully registered patents, on the other. Due to the lower risk of the buyer and the possibility to create trust with the buyer through business planning, earn-out arrangements increase the chance of reaching an agreement and a "fair" final purchase price.
How is the sale of a GmbH & Co. KG taxed in Germany?
When drafting the purchase agreement of a GmbH & Co. KG, tax aspects also play a major role in addition to the question of the purchase price. As a corporate form, the GmbH & Co. KG offers some leeway from a tax point of view, which can be used in a targeted manner by means of an individual design for the parties.
It should first be noted that the taxation of the sale of a GmbH & Co. KG (partnership) differs fundamentally from that of a GmbH sale (corporation) in Germany. With regard to the taxation of the seller, a distinction must be made as to whether the GmbH & Co. KG is sold by a private individual or a corporation, e.g. a GmbH. It must be taken into account that the purchase of a partnership, such as the GmbH & Co. KG, is always understood as an asset deal from a tax point of view, even in the case of a share deal.
If a GmbH holds the GmbH & Co. KG and sells it, the ordinary corporate income tax and trade tax will apply to the capital gain in german practice. The capital gain of the GmbH is taxed like the current profit of the corporation. In addition, hidden reserves are always disclosed and taxed when the company is sold.
If, on the other hand, a private individual sells the GmbH & Co. KG in Germany, income tax is due on the capital gain. This results from the difference between the sales price and the sales costs on the one hand (including lawyer and notary costs) and the taxable book value on the other hand. If the entire company is sold by a private individual, this may be subject to income and trade tax. With regard to income tax, on the one hand there is a certain exemption, on the other hand a reduction of the average income tax rate is possible for capital gains up to EUR 5.0 million. In addition, the German Income Tax Act provides for the so-called one-fifth rule, which reduces the progression (Section 34 (1) EStG). Finally, the profit attributable to a private individual as a co-entrepreneur can be exempted from trade tax. However, the prerequisite for this exemption is that the entire co-entrepreneurial share, including the special business assets, is sold.
The assets taken over by the buyer are capitalized in the buyer's balance sheet, irrespective of whether a share purchase or an asset deal is involved, and depreciated over time according to the usual depreciation methods.
Caution: Transfer taxes - also in the case of a company purchase in Germany
It should be noted, however, that the purchase of a GmbH & Co. KG in Germany can also result in high transaction taxes. However, an exemption from turnover tax applies if there is a sale of the business as a whole. In the case of the movement of real estate assets within the scope of the acquisition of the GmbH & Co. KG, on the other hand, may be subject to real estate transfer tax.
A detailed description of the taxation of the sale of a GmbH & Co. KG under german law can be found here: Taxation sale/purchase GmbH & Co. KG