Selling a Manufacturing Company

Why valuation and sale preparation cannot be handled with standard advisory services

Owners of manufacturing companies often think that a sale is primarily a matter for an accountant or financial advisor. In reality, it is a discipline that connects law, taxes, investment mathematics and business strategy. A mistake in any of these areas can have impacts in the millions.

Many companies enter a sale without a clear understanding of what exactly they are selling and what the price is based on. This leads to situations where the owner overvalues the company and discourages potential buyers, or, conversely, sells below value. Sometimes the sale does not go through at all because during the review (Due Diligence) the buyer discovers legal or tax issues that were not addressed at the outset.

Attorneys from ARROWS advokátní kancelář have hands-on experience with the sale of manufacturing companies. They understand what lies beneath the surface-level numbers in financial statements, can identify legal risks that other advisors overlook, and know how to structure a transaction so that it is safe and efficient for the seller.

Methods for valuing a manufacturing company – what you should know

You cannot value a manufacturing company simply by taking its revenues and multiplying them by some number. Revenue is only a rough metric – what really matters is how much profit the company generates and how stable and predictable that profit is.

Adjusted EBITDA – the most common method in practice

The standard method for valuing a manufacturing company, used both in the Czech Republic and abroad, is the Multiple of Earnings method, specifically multiplying Adjusted EBITDA (adjusted profitability). EBITDA means operating result before taxation and interest payments, minus depreciation and amortisation – in simplified terms: how much money the company generates from its operating activities.

The formula is simple and easy to understand, but applying it correctly requires careful work:

Company valuation = Adjusted EBITDA × Multiple + Cash + Inventory – Debt – Working capital

What lies behind this formula? Adjusted EBITDA is not simply a number from the accounts. It also includes so-called add-backs – items added back to profitability because they are discretionary in nature. Examples include the owner’s salary if they are employed in the company’s operations (the new owner will, after all, pay themselves their own salary); or one-off expenses that will not recur under the new owner.

A specific example: the owner of a manufacturing company takes an extraordinary bonus of CZK 500,000 each year that applies only to them. This bonus is added back to profit for valuation purposes because the buyer will be able to retain that profit. Correctly identifying these add-backs can therefore increase the company’s valuation by tens of percent.

The multiple – the coefficient by which EBITDA is multiplied – then depends on market conditions, competition, risk and outlook. In the Czech Republic, for manufacturing companies it typically ranges within several multiples of EBITDA, with companies with higher EBITDA often achieving a higher multiple. However, the factor that influences the multiple the most is the industry – a bakery will be valued differently than industrial production of specialised components.

What lies behind the multiple – practical factors

Why does one plastics manufacturer sell the company for 3.9× EBITDA while another sells for 5.8×? Investors look at factors that are not recorded in the accounts.

Customer diversification. If companies generate revenue from five major long-term contracts, that is more attractive from an investment perspective than dependence on one dominant customer. The problem arises when that customer leaves – and in a company sale, this is one of the first signals a buyer examines.

Team quality and stability. A manufacturing company is difficult to sell without a plant manager or production foreman. If key people are retiring or ready to leave, the multiple decreases. Conversely, if you have a strong team that will stay, it is a factor that increases the price.

Technological level of production and efficiency. Automation, proprietary patents, specialised equipment – all of this increases value. Likewise, if production is outdated and requires major investment, value decreases.

Legal and regulatory position. If the company is accompanied by legal disputes, tax audits or regulatory uncertainty, it signals higher risk to the buyer. At the other end of the spectrum are companies with a clean legal history and properly maintained certifications, which increase the multiple.

Relationships with the state and suppliers. A good reputation, stable relationships with key suppliers, no tax arrears – all of this matters.

Working capital and Cash Free Debt Free

The formula includes working capital – essentially the amount of money the company ties up in day-to-day operations: cash on hand, material inventory, unpaid customer invoices minus unpaid supplier invoices. This item is deducted from the valuation because the buyer does not replace it.

The Cash Free Debt Free method is a common approach in the Czech Republic. Under this approach, the company’s price is determined based on a reference set of financial statements (for example, the balance sheet as at 31 December of the previous year), but all changes that occur up to the actual handover of the company (such as increases or decreases in cash, repayment of debt or taking on new debt) accrue to the benefit or detriment of the seller. This approach avoids complicated disputes about what happened in the period between signing and closing the transaction.

Preparing for the sale – what must not be underestimated

Selling a manufacturing company is not a matter of a month or two. Proper preparation starts months before you even put the company on the market. Many owners do not realize this and enter negotiations in a situation where they lack key documents or where their accounting does not allow them to substantiate the truthfulness of their claims.

Documentation package – the devil is in the details

The buyer does not want to buy a “pig in a poke”. That means they want to see the company’s exact status—legal, asset-related, and financial. If you do not answer their questions clearly and completely, they will either be discouraged from the purchase or will reflect their doubts in a lower price.

The set of documents you should have prepared includes:

• Financial statements for at least the last three years (balance sheet, profit and loss statement, cash flow). These statements must be clean—without additional auditor’s remarks, without significant provisions for legal disputes, without mysterious items.
• Asset structure – a list of all real estate, machinery, land, and rights (patents, trademarks, licences, software rights). For real estate, you should have available , condition descriptions, and photo documentation. For vehicles: type, equipment, year of manufacture, odometer reading, photo documentation; for special equipment, detailed technical descriptions.
• Lists of clients and their contracts. This is not about introducing the names of all customers (that could lead to their departure), but a clear structure: what percentage of revenue comes from the top 10 clients, how long the contracts are, whether there are any exclusive arrangements or, conversely, risks of cooperation ending.
• HR structure and wages. Number of employees, average wages, management structure, existence of employment contracts, collective bargaining agreements, and any employment-law disputes.
• Legal status: all contracts that are material to the company (long-term purchase or sales contracts, leases, financing, insurance policies); extracts from registers for the company and its executives (e.g., from , ); information on whether the company is listed in debtor registers.
• Tax history. Overviews of all tax returns for the last three years, information on whether the company has been subject to a tax audit, and, if so, what resulted from previous audits.
• Health and safety, certifications, environmental obligations. If the company is subject to standards (e.g., ISO, OHS, EMS), it should have valid certificates available. Likewise, information on whether the company complies with environmental regulations and has no arrears towards  or similar institutions.

Put simply—this is about not wanting anything to be hidden from the buyer, because at that moment they immediately ask why you are hiding it. And once suspicion arises, it is hard to dispel and the price drops.

Legal structure of the transaction – Share Deal vs. Asset Deal

There are two basic ways to sell a company.

A Share Deal means the sale of ownership interests or shares—i.e., the buyer purchases your ownership position in the legal entity. Advantage: simple, fast, and there is no interruption of the company’s legal continuity (contracts remain in force with the same legal entity).
Disadvantage: the buyer assumes all liabilities, debts, and past risks—including those the seller does not know about. This is why, in a Share Deal, the buyer requires a much more detailed review (Due Diligence) to understand what they are getting into.

An Asset Deal means the sale of individual assets—machines, inventory, real estate, rights (patents, licences). The buyer chooses which contracts to take over and which not to. Advantage: the buyer selects what they want and can leave behind old liabilities; the seller is partially protected because not all past risks transfer to the buyer.
Disadvantage: an Asset Deal is more complex legally (assets must be transferred individually, which may require third-party consents and more administration) and usually results in a different tax burden for the seller.

Which route is better for you? That depends on the specific circumstances—your company’s legal history, its debts, whether there are long-term contracts you want to preserve, and what the tax impacts are. Our attorneys in Prague at ARROWS will guide you in this decision and help you structure the transaction so that it is optimal for you.

Table of key risks and how ARROWS helps

The sale process step by step – what to expect

The sale of a company usually takes place in several well-defined phases. Understanding their sequence and what can happen at each stage is key to managing the process.

Choosing the transaction strategy and selecting the buyer

Once you decide to sell, you need to be clear about who you are looking for. Potential buyers may include:

• Competitors (strategic buyers) who acquire your company to expand or to obtain your technology or market position.
• Private investors or capital groups (private equity) who buy the company as an investment with the aim of selling it again later, or expanding it and then selling it.
• Foreign buyers, potentially subject to regulatory influences (e.g., companies from the USA, where different valuation or tax standards may apply).
• Management buyouts – i.e., your company is purchased by its own management with the help of external financing.

Each type of buyer has different requirements, a different investment horizon, and a different approach to price and transaction structure. Choosing the right buyer and identifying their requirements is important already at the initial stage. The attorneys at ARROWS, a Prague-based law firm, have experience with various types of buyers and know how to communicate with them and structure the transaction so that it benefits you.

Letter of Intent and Memorandum of Understanding

Once a serious interested party is found, a so-called Letter of Intent or Memorandum of Understanding is usually signed, sometimes also referred to as a Term Sheet. This is a preliminary agreement that sets the basic parameters of the transaction: indicative price, structure (Share Deal or Asset Deal), closing date, and key terms.

A Letter of Intent is usually not a binding legal document regarding the purchase itself, but it creates a certain moral and legal reliance, especially in terms of confidentiality and exclusivity. The buyer typically signs it on the condition that they can carry out Due Diligence (a review) and that the transaction will proceed only if the Due Diligence is successful.

At this stage, exclusivity is also often agreed – meaning you commit not to negotiate with other interested parties for a certain period (usually 60–90 days). This is attractive to the buyer because they know that during the review no one else will offer a better price. For you, it means that if issues later arise during the financial or legal audit, you are tied up and cannot turn to another buyer.

The attorneys at ARROWS, a Prague-based law firm, review the Letter of Intent carefully and ensure it is safe for you – in particular, that exclusivity lasts for a reasonable period and that the transaction is not locked into terms you would later be unable to meet.

Due Diligence – company review

This is the most complex and longest phase, and it often becomes the point at which the transaction is either completed or collapses.

Due Diligence is a targeted review carried out by the buyer (usually with the help of their lawyers and auditors). Its purpose is to verify all key information and identify any legal, financial or operational issues that could affect the price or the completion of the transaction.

Legal Due Diligence focuses on:

• Verification of the ownership structure and legal status of the company – is the company properly registered, are there any ownership disputes, are there any pledges over shares?
• Verification of all material contracts – with customers, suppliers, banks, landlords. This is where the above-mentioned change of control clauses and other risky provisions are identified.
• Verification of rights and obligations – does the company have all required licences, certificates, permits? Are there any legal disputes involving the company?
• Verification of intellectual property rights – patents, trademarks, software, copyrights.
• Verification of tax history – whether the company is listed as a debtor, whether there are long-running tax disputes or penalties.
• Verification of employment-law status – whether there are disputes with former or current employees, and whether all wages and insurance contributions are duly paid.
• Verification of regulatory compliance –  (personal data protection), employment law, environment, consumer protection, occupational health and safety.

During Due Diligence, the buyer typically asks thousands of detailed questions and you (together with your lawyer) must respond. If issues come to light during Due Diligence, they then become the subject of negotiations – a price reduction, the provision of seller guarantees (so-called representations and warranties), or even termination of the transaction.

The attorneys at ARROWS, a Prague-based law firm, are involved on your side of the process – helping you prepare responses that are accurate and protect you. In parallel, they can also carry out your own legal audit (your own due diligence) – this allows you to identify issues before the buyer discovers them and address them proactively. ARROWS attorneys thus act as your “watchdogs” and protectors at this stage.

Binding offer and preparation of transaction documentation

Once Due Diligence “goes well” (the buyer does not find anything that would spook them), a binding offer follows. At this stage, the parties negotiate seriously on the price itself, deadlines and conditions.

This is followed by the most comprehensive part – preparing the transaction documentation. This is not just one document, but a set of documents:

• Share transfer agreement (in a Share Deal) or a business/part of a business/individual assets purchase agreement (in an Asset Deal) – the main document that fixes the price, the transfer date, and the obligations of the seller and the buyer.
• Representations and Warranties – all statements the seller gives (e.g., “the company has no legal disputes”, “all contracts are in order”, “the company complies with all legal regulations”). The buyer may later seek compensation if these warranties prove to be untrue.
• Indemnification schedule – a list of risks that are known and that the buyer “signs up to” by signing (i.e., accepts with knowledge of these risks) and/or arrangements as to who will bear the risks arising from future events related to the company’s past.
• Closing accounts and reference data – precise financial data as at the transfer date, on the basis of which the final purchase price is determined.

The attorneys of ARROWS, a Prague-based law firm, are key at this stage – they prepare, review, and negotiate all of these documents.Their role is to protect you against overly broad warranties, negotiate reasonable limitation periods for which you will be liable, and ensure that the transaction is legally clean.

Signing and closing the transaction

Once all documents have been agreed and both parties consent, the signing of the agreement and the transfer of ownership follow. At this stage, the legal formalities are usually carried out as well – registration in the Commercial Register, transfer of assets, notarisation of documents, and, where applicable, filing with the Commercial Register.

Tax aspects of a sale – without getting it right, there is no profit

The sale of a company has significant tax consequences, and if set up incorrectly, you may lose part of the proceeds.

When selling ownership interests or shares, the tax burden differs for individuals and legal entities.

• Individuals: Income from the sale of an ownership interest or shares is exempt from personal income tax if the so-called time test is met. For an ownership interest, this is typically five years between acquisition and sale; for securities, typically three years. If these periods are not met, the income is taxable at the personal income tax rate (e.g., 15% or 23% depending on the total amount of income).
• Legal entities: Income from the sale of an ownership interest or shares is generally taxable for legal entities under corporate income tax at a rate of 21%. Exceptions apply where an exemption is available under Czech legislation, e.g., where the conditions for exemption of income from the sale of an ownership interest in a subsidiary are met (e.g., holding the interest for at least 12 months and a minimum holding of 10%, subject to additional conditions set out in the Income Taxes Act, which transpose the rules of the EU Parent-Subsidiary Directive).

However, there are ways to optimise the tax liability – for example, Hold Gain Reserves (if relevant for the specific structure), reinvesting the proceeds, or structuring the transaction to achieve a more tax-efficient outcome. The attorneys and tax advisers at ARROWS, a Prague-based law firm, will help you optimise your tax liability – and this is not only about saving on taxes, but also about having clarity on what net return will remain from the sale.

Final summary

The sale of a manufacturing company is a transaction you cannot afford to underestimate. Whether it is valuation, preparation of documentation, the legal structure of the sale, or vetting the buyer – every step matters, and every step hides risks that need to be managed.

Numbers in the accounts are not everything. What truly determines the price is a combination of profitability (EBITDA), the company’s stability and prospects (multiple), as well as legal certainty, the absence of disputes, and clean documentation. The buyer will verify all of this – and if they do not find order and clarity, they will reduce the price or walk away from the purchase.

Proper preparation for a sale starts months in advance. You need clean accounting, complete documentation, vetted contracts, and resolved legal issues. You cannot afford surprises during Due Diligence.

The attorneys at ARROWS advokátní kancelář understand what lies beneath superficial numbers. They know how to identify risks, how to structure the transaction, how to protect the seller, and how to lead negotiations with the buyer. If you do not want to risk losing millions of Czech crowns or having the transaction fail, entrusting the matter to ARROWS advokátní kancelář is a safe step. Contact us at consultation@arws.cz – we will advise you on valuation, preparation, legal structuring, and throughout the transaction itself.

Read also:

• Expansion via Share Deals in the Czech Republic: Legal Checklist for Safe Growth
• Share Deal vs Asset Deal in the Czech Republic: Key Tax Implications for 2026
• Tax Implications of Mergers and Demergers in the Czech Republic
• How to Structure Intercompany Agreements in a Holding to Avoid Disputes and Tax Risk
• Do Your Board Minutes Pass the Test? How Courts Treat Corporate Resolutions in the Czech Republic