Selling a business step by step

Share Deal or Asset Deal: How to Decide

The choice between a share deal and an asset deal is the first decision that will determine the rest of the transaction. A share deal changes the owner of the company, while the company itself remains what it was: it keeps its contracts, licences, employees, and debts. In an asset deal, on the other hand, the buyer acquires everything that belongs to the business as a whole, even if the parties exclude an individual item from the sale; the legal entity itself remains in the hands of the seller.

For the buyer, the main difference lies in what they acquire with the company. In a share deal, they buy the entire history of the company, including things they don't yet know about. In an asset deal, they become the debtor for debts belonging to the business, but they only take on those whose existence they knew about or could have reasonably foreseen (Section 2177 of the Czech Civil Code). If a creditor does not consent to the buyer's assumption of the debt, the seller is liable for its repayment.

For the seller, the opposite perspective is decisive: what will be left after the transaction and how much of the price will actually remain. A share deal is usually simpler for the owner because the company is sold in its entirety, along with its liabilities. An asset deal means that, in addition to the price for the business, the owner is left with a company without its main operations, which must then be liquidated or used for another purpose, and further taxation of the funds upon payout depends on who the recipient is.

In practice, the choice is made together with a tax advisor, as legal and tax logic often conflict: the path that is safer for the buyer is usually more expensive for the seller. A comparison of the tax impacts of both options, including the sale of a joint-stock company, can be found in the article Acquisition and Sale of a Company 2026. At this point, it is sufficient to know that the choice cannot be postponed until after the letter of intent is signed.

The seller does not always have full control over the choice. The buyer will insist on an asset deal where the company has a tax history, ongoing disputes, or assets they do not want to buy, and will pay for the lower risk with a higher offer. Conversely, the seller will push for a share deal where the company is in good order and there is more than one interested party. The transaction structure is therefore a subject of negotiation, not a technical detail.

Six Steps of a Sale and What Must Remain After Each

Selling a company has six steps, and each has its own output—a document or decision without which it makes no sense to continue. The order is not arbitrary. Whoever skips the preparation and lets the buyer straight into the data is already negotiating only about how much to reduce the price. For a medium-sized Czech company, the entire process usually takes six to twelve months, and its most valuable part lies at the beginning.

The first step is the preparation of the company and its file. The owner has the ownership structure, contracts with key customers, leases, licences, and employment contracts reviewed, and removes what a buyer would identify as a risk: missing consents, unrecorded changes, unsettled loans to shareholders, or assets held in the owner's name. The output is a list of defects and a plan for what can be fixed before the sale.

The second step is approaching buyers and signing a non-disclosure agreement. Only under this agreement is an anonymised overview of the financial performance shared. Who the interested party is and what exactly they will see determines how much of your know-how ends up with a competitor if the negotiations lead nowhere. The output is a short list of interested parties who have the funds and a demonstrable reason to buy.

The third step is a letter of intent or term sheet. It fixes the price range, payment structure, length of exclusive negotiations, and the scope of due diligence. A detailed analysis of the individual phases of the transaction, including what happens between signing and closing, can be found in the article How to Sell a Company. The output of this step is a signed document with specific deadlines.

The fourth step is due diligence, during which the buyer dismantles the company into its component parts. The seller prepares a data room and answers questions; the buyer looks for reasons to pay less. The output is a list of findings that will be reflected in the price and in the warranties in the contract. This is where the difference between the initial offer and what you ultimately receive in your account is decided.

The fifth step is negotiating and signing the transfer agreement. The agreement describes the price and its payment terms, the seller's representations and warranties, liability limits, and what happens if any representation proves to be untrue. The article Due Diligence in a Company Acquisition discusses how a company prepares for due diligence and what a buyer verifies first.

The sixth step is the closing and what happens after it. On the closing day, the price is paid, access is handed over, and an application for the change to be recorded in the Commercial Register is filed. After that, the warranty periods, the duration of the escrow, and usually the seller's non-compete and non-solicitation obligations begin to run. The sale of a company therefore does not end with the signing, but only with the expiration of these periods.

Which steps can be shortened and which, on the contrary, need more time is determined by the state of the documentation, the number of interested parties, and the extent to which the company depends on the owner's person. That is why the lawyers at ARROWS law firm draw up a separate schedule for each sale, even before the owner approaches the first buyer and before committing to exclusive negotiations.

Transaction Documents and What Each of Them Actually Means

Transaction terminology looks complicated, but it is based on five documents, and each of them addresses a different issue. A non-disclosure agreement protects information, a transfer agreement describes the sale, an escrow holds part of the money, an earn-out agreement ties the rest of the price to future results, and a letter of intent holds the negotiations together until the contract is ready. Anyone who knows what each document does will also recognise when the other party is pushing for more than is customary.

A non-disclosure agreement, or NDA for short, is a contract in which the interested party undertakes not to use the information obtained for anything other than evaluating the purchase. The law itself provides only weak protection for confidential data shared during contract negotiations: whoever breaches the obligation and enriches themselves by doing so must surrender to the other party what they have been enriched by. A contractual penalty and a definition of the circle of persons who will see the documents therefore significantly strengthen the protection.

The transfer agreement is the only document that really matters after the transaction. In addition to the price, it contains representations and warranties, i.e., a list of statements about the company for whose truthfulness the seller is responsible, and the limits up to which they are liable. This is where it is decided whether the owner is at ease after two years or is returning part of the purchase price.

Escrow and an earn-out tied to results are two tools with which the buyer addresses a lack of trust in the numbers. Escrow holds back part of the price with a lawyer or a bank in case of warranty claims, while an earn-out ties the remainder to revenues or profits in the following years. The entire sale process, from the decision to sell to the closing, is covered in the book How to Sell a Company with Real Estate.

Letter of Intent

A letter of intent, or term sheet, is a document in which the buyer summarises the conditions under which they are interested in the company. It is generally not binding for the conclusion of the deal, but the parties usually explicitly designate the provisions on confidentiality, exclusive negotiations, and cost reimbursement as binding; the wording of the document is always decisive, not its title. Moreover, anyone who terminates negotiations contrary to the reasonable expectations of the other party and without a just cause acts in bad faith and is liable for damages (Section 1729 of the Czech Civil Code).

Four parts of the letter of intent are usually designated as binding, and these are negotiated as carefully as the contract itself. Confidentiality determines what the interested party may do with the data. Exclusive negotiation states how long you may not talk to anyone else. The scope and deadline for due diligence prevent the questioning from dragging on indefinitely. And the cost arrangement decides who pays for what if the transaction does not go through.

The price, on the other hand, is usually non-binding and conditional on the outcome of the due diligence, but here too, the wording is decisive: if the parties express the will to agree on it as binding, the title of the document does not change that. The seller protects themselves against subsequent reductions by stipulating rules in the letter: what findings can reduce the price, how their impact is quantified, and that a finding already known from the documents before signing is not a reason for a discount.

What Makes Up the Price and What Changes It After Signing

The price the parties agree on is not the amount that arrives in the seller's bank account. Between the agreed value of the business and the actual payout stand the company's debt, its cash on hand, the state of working capital at the closing date, and the portion of the price that the buyer withholds. The difference between these two numbers is often significant and receives less attention in negotiations than it deserves.

Furthermore, the buyer needs to know as of which date the company's status is calculated. Either the price is fixed as of the date of the last financial statements and does not change thereafter, or it is calculated after closing based on the actual state of debt, cash, and working capital. The first path gives the seller certainty about the amount, the second gives them certainty that their performance up to the last day will be accounted for.

The buyer will release the withheld amount once the agreed period has elapsed and it becomes clear that the seller's representations were true. If they were not true, the buyer will apply a discount from the purchase price from it. A dispute over the amount of this discount is the most common dispute after closing, because the contract usually describes when a discount arises, but not precisely enough how it is calculated and who calculates it.

The Supreme Court, in its judgment of 6 May 2025, file no. 23 Cdo 713/2024, confirmed that the parties can validly agree that the amount of the discount on the price for the transfer of a share in a business corporation will be determined by a pre-selected expert. For the seller, this provides certainty about how it will be calculated and a shorter dispute if a discount actually occurs.

In the same decision, the court, under the circumstances of the case, also allowed the set-off of a claim for a discount against the outstanding balance of the price, because both claims arose from the same contract and were closely linked. The seller should therefore not expect to be able to claim the balance before the dispute over the warranties is resolved. The due date of the balance and the mechanism for calculating the discount are thus among the most important provisions of the entire contract.

What the Law Requires When Selling a Company

The transfer of a share in a limited liability company has strict formal requirements, and failure to comply with them postpones the moment from when the buyer becomes a shareholder. For a share that is not represented by a common certificate, the transfer agreement must be in writing with officially certified signatures, and the transfer is effective towards the company only upon delivery of an effective agreement. The acquirer also accedes to the articles of association, and the transferor is liable to the company for debts that were transferred with the share.

If a share is transferred to a person who is not a shareholder, the consent of the general meeting is usually required, unless the articles of association provide otherwise, and the contract does not become effective until consent is granted (Sections 208 and 209 of the Czech Business Corporations Act). If consent is not granted within six months from the date of conclusion of the contract, the same effects as withdrawal from the contract occur.

In an asset deal, the rules change and obligations towards third parties are added. The seller must, without undue delay, notify their creditors and debtors that they have sold the business and to whom. A creditor who did not consent to the sale and whose claim's recoverability has worsened as a result of the sale may also seek a court declaration that the sale is ineffective against them; this right expires if not exercised within one month from the day they learned of the sale, but no later than three years from the effective date of the contract.

The question of when the buyer becomes the owner is also related to an asset deal. If the buyer is registered in a public register, they acquire ownership of the business as a whole only upon the publication of the fact that they have deposited the document of purchase of the business in the Collection of Deeds. This does not affect the obligations to register rights to individual assets under other regulations, typically for real estate, nor the restrictions arising from licence agreements.

Employees are the third area where the two paths differ. In a share deal, the employer does not change, and employment relationships continue without change. In a transfer of the employer's activity or a part thereof, the rights and obligations from employment relationships pass to the transferee employer (Section 338 of the Czech Labour Code), and both employers have an obligation to inform at least thirty days in advance.

In an asset deal, the five conditions that the Labour Code otherwise requires for a transfer are not examined: the Civil Code explicitly considers the purchase of a business as a transfer of the employer's activity, so the relationships are transferred by law. The five conditions apply to other transfers of activity. That is why the lawyers at ARROWS law firm assess the transfer of employees for each transaction separately, even before the transfer agreement is signed.

How an Experienced Buyer Behaves

An experienced buyer proceeds in a fixed order and expects the same from the seller. First, they verify that the owner really wants to sell and in what price range, only then do they pay for advisors. They commission due diligence with a defined scope and deadline, not open-ended. And it only makes sense to talk about the price with them when they have financing promised in writing from a bank or an investment committee.

On the seller's side, a prepared data room, one person responsible for all communication, and pre-resolved formalities are standard. The article How to Transfer a Share in an s.r.o. describes what the transfer of a share itself entails, from the form of the contract to the registration in the register.

There are four warning signs on the buyer's side, and each of them is worth slowing down the negotiations for. The interested party fails to prove the source of financing. They demand exclusive negotiations for six months without any deadlines. They expand the scope of due diligence beyond what was agreed in the letter of intent. And after due diligence, they reduce the price by tens of percent with reference to generally formulated findings.

The last signal deserves an explanation. A price reduction after due diligence is legitimate when the buyer names a specific finding and quantifies its impact on the company's value. If the discount is justified only in general terms, it is usually a negotiating tactic that counts on the fact that the seller has already invested months of work and considerable money in advisors.

Companies that manage the sale successfully conduct their own due diligence, and do it earlier. A pre-market legal and financial due diligence on the seller's side costs a fraction of the price, and its purpose is not to make a good impression, but to find out what the buyer will find and to have a prepared answer for it. A finding that the seller discloses and explains themselves is usually not a reason for a discount. The same finding discovered by the buyer in the data room usually is.

The Seller's Mistakes and How Much They Cost

The most expensive mistake is starting too late. The owner decides to sell and offers the company within a few weeks. The buyer then finds things in the due diligence that could have been fixed in a few months, such as unrecorded changes in the articles of association, assets held in the owner's name, or missing consents for the assignment of contracts, and reflects them in a discount. A fix after signing the letter of intent is no longer an advantage, but a concession.

The second mistake is overlooking the tax holding period test. Income of a natural person from the paid transfer of a share in a business corporation is exempt from tax if the period between acquisition and transfer exceeds five years, with exceptions listed by the law (Section 4 of the Czech Income Tax Act). Anyone who restructures their shareholding among their own companies shortly before the sale may deprive themselves of the exemption.

The third mistake is signing representations and warranties without review. The seller perceives them as a formality and signs a list of statements about the company that they cannot verify, for example, that all contracts are valid and without disputes. Each such statement is a potential claim for a price discount. The solution is not to refuse the warranties, but to limit them by what was made available to the buyer in the due diligence, and to add limits and time periods.

The fourth mistake is underestimating how much the company relies on the owner. If the key relationship with customers, suppliers, and the bank is tied to one person, the buyer will price this in with a discount, an earn-out tied to future results, or a requirement that the owner remains with the company for another two years in a role they did not choose for themselves.

The fifth mistake is a premature announcement of the sale within the company. Information about the negotiations reaches key people before it is clear that the transaction will go through, and within a few weeks, the company loses part of its team and the peace for normal operations. The buyer will see this in the due diligence and price it in, because they are buying, among other things, staff stability. The timing of the communication therefore belongs in the schedule just as much as the signing date.

Which of these mistakes are a real threat in your company can be seen from the ownership structure, contracts with key customers, and who actually runs the company. That is why the lawyers at ARROWS law firm start with due diligence on the seller's side before the company hits the market and before anyone sees the first numbers.

What Threatens the Sale of a Company and Where Losses Arise

Final Summary

Selling a company is a managed process in which the outcome is decided before the first offer appears. The choice between a share deal and an asset deal, the quality of preparation, the terms of the letter of intent, and the scope of warranties in the transfer agreement together determine how much of the agreed price ultimately remains with the owner.

For the company's management, there is only one practical conclusion: preparation must begin before the final decision to sell is made. A postponed decision does not show up immediately, but at the moment the buyer presents a list of findings from the due diligence and, with it, a proposal for a new price. At that point, the seller is no longer negotiating the value of the company, but the size of the concession.

The lawyers at ARROWS law firm will prepare the company for sale, review and negotiate the transfer agreement, set up the escrow and warranties, and represent the seller in negotiations with the buyer and their advisors. They provide the same support even when the buyer is a foreign group and part of the documentation is negotiated in English. The firm also connects clients who are looking for a buyer, investor, or business partner.

If you want to discuss the sale before you approach the first interested party, write to consultation@arws.cz. The initial consultation serves to help the owner clarify what can still be fixed before the sale; an overview of our entire transaction advisory agenda can be found on the company sales and transaction advisory page.