How does one sell ones company – share deal or asset deal?

The terms share deal and asset have established themselves in company sales negotiations, in contract texts and in the literature on the topic of company sales. Therefore, a short clarification is appropriate. A share deal is the sale of shares, for instance a GmbH (limited liability company) share or share in a KG (limited partnership) or OHG (general partnership). The seller is the shareholder as the owner of the shares. With the sale of the shares, which constitute the legal framework of the business, the business is automatically transferred. An asset deal is nothing other than a business sale, i.e. the company’s assets or the business, i.e. machines, reserves, receivables, liabilities are transferred as required for the organization. Here, the seller is the director of the company, generally with the required approval of the shareholders. This is significant insofar as the shareholder and director are not one and the same person. Example: The family owns the company, but has the operations run by an employed, “outside” manager. So far, so easy. As expected, the differences between civil law and tax law still have a few surprises in store.

Individual companies can only be sold as asset deals, i.e. the salesperson sells the business assets of his or her individual company, since the individual company does not have its own legal personality. This applies in both civil and tax law. Capital companies can either be sold by transferring the shares, ergo a share deal, or by a GmbH selling its business assets, an asset deal. Here too, there is no difference between civil and tax law with regards to the allocation as a share deal or asset deal. Particularities arise when it comes to partnerships. If the shares of a KG or OHG are transferred as per civil law, i.e. sold, then this is treated as an asset deal with regards to tax law. I.e., tax law simulates the potential partial purchase of the business assets of the partnership for the purchaser of the shares. This has tax-related benefits for the company purchaser since business assets can be amortized, but the shares of a company, as non-depreciable financial goods, cannot.

For the company seller, the sale of a partnership is therefore advantageous because he or she can bring up the tax benefits for the company seller in the framework of purchase price negotiations as an argument that increases value. On the other hand, the income tax burden for company sellers over the age of 55 is slightly more than half the normal income tax rate. The conclusion that capital company sellers should therefore choose the asset deal is, however, not correct as such, since the asset deal is, in principle, disadvantageous for the seller when selling a capital company. This is because the sale of the business is not treated any differently than any other turnover. Ergo, completely normal commercial and corporate taxes are incurred on the sales profits from the sale of the business. If the seller then distributes the profits after taxes to then liquidate the empty shell of the capital company, the usual withholding tax of 25% plus solidarity surcharge has to be paid. The total tax burden is therefore significantly higher than if the seller were to sell the shares of its GmbH or AG (stock company). In this case, only the income taxes in the framework of the partial income process are incurred with a tax burden of maximum, approx. 27% plus solidarity surcharge.

No principle without exception. The asset deal can be sensible for company sellers of a GmbH or AG if

1.    there are sufficient tax losses carried over in the company that can be utilized in this manner.

2.    due to a low yield in the company, the purchase price is expected to be more or less the balance sheet equity capital.

In the first case, the profit is more or less compensated by the losses carried over. In the second case, no profit is generated because the company is ultimately sold at its booking price. This is nothing other than the sale at the value of the indicated equity capital.

The employees are transferred to the purchaser along with the company assets in a share deal. But an automatism also applies in an asset deal, which is regulated in § 613a of the BGB. Therefore, in the event of a company sale, the employment contracts are also transferred. This regulation is contractually mandatory.

With regards to sales tax, a company sale, called a business sale there, is not considered taxable revenue which means no sales tax-related consequences need to be taken into account. The sale of shares is sales tax free.

As a result, the tax advantages for the purchaser from an asset deal are the other side of the tax disadvantages for the seller. The exceptions were listed under 1. and 2. The sale of partnerships is beneficial to both parties. The seller can sell shares, will be treated courteously with regards to taxes and the purchaser is benefited by the fiction of an asset deal with which the purchaser can amortize these and thus the exchequer is involved in the financing of the purchase price. Share sales in capital companies are (still) treated mildly with regards to taxes as the income tax burden is around 27%. The company is assessed in order to determine the purchase price in accordance with the earnings value process for both share deals and asset deals. There is therefore no rule that asset deal sales have to be based on the substance value and a share deal has to be based on the earnings value. The seller must take the tax effect into account in the assessment in an asset deal.