How to Prepare a Company for Sale: Legal and Tax Issues That Most Often Derail the Entire Transaction

Selling a company may seem like a straightforward transaction at first glance. In practice, however, it is a complex process with many legal and tax pitfalls. Insufficient preparation for due diligence often leads to the discovery of hidden issues, which may result in a reduction of the purchase price, a delay of the transaction, or its complete cancellation. In this article, you will learn which mistakes to avoid most often and how to prepare effectively for the sale of a company.

Quick summary

• Insufficient preparation for due diligence – the buyer reviews documentation, accounting, legal matters, and hidden liabilities. Lack of preparation leads to issues that could have been resolved in advance.
• Major tax mistakes when choosing the transaction structure – an incorrect choice between a share deal and an asset deal can cost hundreds of thousands to millions of Czech crowns in tax burdens.
• Unclear liability and hidden warranties – without clearly agreed liability caps, you risk buyer claims for several years in the event of defects or breaches of contractual representations and warranties.
• Missing or incomplete documentation – the absence of high-quality documentation prolongs the transaction, increases due diligence costs, and enables the buyer to reduce the offer.

Insufficient preparation for due diligence: The most common critical mistake

The foundation of every successful sale lies in preparing for so-called due diligence, which is one of the most important steps in the entire process. It is an in-depth analysis of the company carried out by the buyer and their advisors—lawyers, tax advisors, and auditors. Their goal is to uncover the company’s true condition and identify all risks.

Many owners underestimate this step and resist sharing information. A mistake. When the buyer encounters an issue during the review that you concealed or that they were not aware of, two scenarios follow: either the transaction falls through, or they reduce the price by tens of percent.

Examples include a legal dispute with a former employee that you did not mention, an unregistered trademark, or a tax issue from previous years. The buyer will uncover all of this and reflect it in a lower offer.

The attorneys at ARROWS, a Prague-based law firm, recommend carrying out a so-called “trial due diligence” even before you put the company up for sale. At this stage, it usually also makes sense to involve legal support to set up the transaction and documentation as part of company sales and transaction advisory. Go through all key areas of the company yourself: review the accounting, legal documents, customer and supplier contracts, intellectual property registrations, employee records, and all legal disputes.

Create a list of the items that are not in order and fix them during the preparation for the sale.

Key areas the buyer will always focus on:

• The company’s financial position: The buyer will review the accounting, tax returns, cash flow, and all financial statements. They look for inconsistencies, hidden debts, unresolved tax issues, or unusual transactions. If you have issues with tax filings or were unsure about calculations, correct it in advance. Practical contexts in which tax risks most often surface in due diligence (e.g., with uncollectible invoices) are also summarized in the update Unpaid B2B receivables: When can invoice losses be claimed as a tax-deductible expense and meet the strict requirements of the tax authority.
• Legal matters and contracts: The buyer wants to see all contracts with customers, suppliers, landlords, and creditors. They check whether there are any restrictions that could prevent the sale. For example: Does the bank, landlord, or business partner need to be notified of a change of ownership? Is there a clause in any contract that would block the transaction? Are all contracts valid and are their terms being complied with?
• Employment law matters: The buyer assesses what obligations the company has towards employees. They look for disputes with former employees, unpaid wages, insurance issues, or non-compliance with legal obligations under Czech legislation. To set up employment documentation and prevent disputes when selling a company, you can also use support in the area of employment law. It does not matter whether these are issues you did not notice yourself—the buyer will notice them and factor them into the price.
• Intellectual property: If your company has patents, trademarks, designs, or software—everything must be properly registered, and it must be clear who the owner is. If you are infringing someone else’s intellectual property, you face litigation, which the buyer will automatically factor into their calculations.

Legal due diligence in practice: What the buyer actually reviews

Due diligence is not just a passive review. It involves systematic checks that typically include:

• Review of all legal documents related to the company—articles of association, bylaws, shareholders’ resolutions, minutes of general meetings, and all changes in the legal structure. Here, the buyer pays particular attention to whether everything was properly registered, whether all signatures are duly certified, and whether there are any legal ambiguities in the company’s history.
• Review of all contracts and their terms—contracts with customers, suppliers, landlords, banks, and others. Particularly important: Do they contain any clauses that could block the transaction? Are there clauses that change or terminate rights upon a change of ownership? Are there any restrictions in these contracts that would be disadvantageous for the new owner?
• Identification of all legal risks and liabilities—are there any obligations that are not recorded in the accounts? The tax aspects of reorganizations and intra-group transfers, which often also feed into the identification of “hidden” liabilities, are discussed in the update Tax implications of mergers and spin-offs: How to comply with the rules for tax neutrality when reorganizing corporate structures. Are there any future obligations that will arise later? Are there any environmental burdens that could lead to an obligation to remediate them? (This is particularly important when selling an industrial property— as the obligation may transfer to the new owner.)
• Compliance review—does your company operate in full compliance with all relevant regulations under Czech law? Do you have all necessary licences and permits? Do you meet all compliance obligations? Are all details that should be registered properly registered?

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The attorneys at ARROWS, a Prague-based law firm, can help you with this process even before you start a formal sale. They can carry out a legal audit, identify weak points, and help you resolve them. This will save you time and ensure that when due diligence actually begins, you will be prepared.

Key tax mistakes: Share deal versus asset deal

One of the most common mistakes owners make is underestimating the tax implications of a sale. The choice between a share deal (sale of ownership interests) and an asset deal (sale of assets) can make a difference of millions of Czech crowns.

Share deal: Sale of ownership interests or shares

In a share deal, the buyer purchases your ownership interest or shares in a business corporation. The company itself remains the same—only the owner changes. From this perspective, it is a simpler solution: you sign one agreement and you are done.

From a tax perspective, the situation in 2026 is favourable: If an individual meets the time test (5 years for ownership interests in an s.r.o. and other business corporations, 3 years for securities such as shares), the entire income from the sale is exempt from personal income tax regardless of the transaction amount. No limits—whether you sell for CZK 50 million or CZK 500 million, you will pay zero Czech crowns in tax.

This applies in accordance with Section 4(1)(s) of Act No. 586/1992 Coll., on Income Taxes, as amended and effective in 2026.

Condition: You must have been the owner for the required period of time. If so, it is an excellent scenario.

But beware: in a share deal, the buyer does not only take over the company’s current state—they also buy its history. All hidden issues, old legal disputes, unresolved tax matters—everything remains in the company under the new owner. That is why share deals place significantly greater emphasis on due diligence and the buyer’s contractual protection through representations and warranties.

Asset deal: Sale of assets

In an asset deal, you sell individual assets: real estate, machinery, inventory, receivables, intellectual property rights, etc. The company itself remains in the original ownership.

From a tax perspective, this is a substantially less favourable case. The business first pays corporate income tax (21% of profit) and then you must distribute the profit as a dividend, which is subject to withholding tax (15%).

The overall tax impact represents an effective tax rate of 32.85%. With a profit of CZK 3 million, you will pay more than CZK 985,000 in taxes.

The difference compared to a share deal—more than CZK 1 million lost.

However, an asset deal has one advantage: the buyer assumes only what is expressly stated in the contract. They do not step into old liabilities unless you transfer them. This means lower risk for the seller regarding historical issues, but higher risk for the buyer. In certain situations (for example, if you want to deal with legacy issues that would otherwise deter a buyer from a share deal), this may be a solution.

Tax advisers and attorneys at ARROWS, a Prague-based law firm, can help you properly assess both options based on your specific situation. It is important to say that this decision must be made before you embark on a formal sale—the resulting tax and legal implications will affect absolutely everything.

Most common questions on the tax implications of a sale

1. Do I pay tax even if I sell the company at a loss?
If you sell an ownership interest or shares and the result is a tax loss (the sale price is lower than your acquisition price), you do not pay income tax on this income. However, it is important to know that a tax loss from the sale of ownership interests or shares that meet the time test for exemption is generally not tax-deductible and cannot be offset against other taxable income. In the case of taxable income from a sale, a loss from the sale of the same type of asset may be offset only up to the amount of the related gains. For specific situations, it is advisable to consult a tax adviser.

2. What if I inherited the company and am now selling it?
A special regime applies here. If you inherited the company, the period during which it was owned by the deceased (the original owner) is added to your ownership period for the purposes of meeting the time test for income tax exemption. This means that if, for example, the deceased owned the company for 3 years and you own it for another 2 years, your time test is already met (5 years). This exception is set out in Section 4(1)(s) of the Income Taxes Act.

3. I know I am a VAT payer. Is VAT payable on the sale of a company?
The sale of ownership interests (a share deal) is exempt from VAT, as it is considered a supply of a security within the meaning of Section 54(1)(a) of Act No. 235/2004 Coll., on Value Added Tax (the VAT Act). If it is an asset deal and you sell an enterprise or its functionally independent part as a whole, it is typically also exempt from VAT under Section 56a of the VAT Act. However, if you sell only individual assets (e.g., machinery outside the enterprise-sale regime), VAT will apply under standard conditions. This distinction is critical, and mistakes here lead to additional VAT assessments and related penalties. That is why the attorneys at ARROWS, a Prague-based law firm, recommend structuring the transaction from the outset.

Liability for defects and representations and warranties: How to manage risk

One of the riskiest parts of a purchase agreement is representations and warranties (in English-language agreements referred to as “representations and warranties"). Through these, the seller promises the buyer that certain facts about the company are true.

Typical representations and warranties include:

• That the company has all necessary licences and permits.
• That all stated financial information is accurate and complete.
• That there are no hidden debts or legal disputes.
• That the accounting is kept in accordance with the law.
• That all contracts with customers and suppliers are valid.
• That all intellectual property is protected and not being infringed.

If it later turns out that your representations were not true, you may be liable to the buyer. If an issue arises that you should have warranted in the representations, the buyer may assert a claim for damages against you. This may occur months or even years after the sale.

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That is precisely why it is critically important to properly agree liability caps in the purchase agreement. Without adequate contractual arrangements, the general rules of the Czech Civil Code on liability for defects apply, which set a notification period of two years from taking over the item (in the case of an ownership interest) or the enterprise.

For claims arising from a breach of contractual representations and warranties, the general three-year limitation period applies unless the purchase agreement provides otherwise.

However, it should be noted that for certain specific types of risks, such as environmental liabilities or tax arrears, legislation may provide for longer periods. Without a limitation of liability in the purchase agreement, the amount can reach millions of Czech crowns.

The right strategy includes:

• Limitation of liability over time – agree with the buyer by when claims may be asserted. Typically, periods of 12–24 months from closing are agreed for ordinary defects, with exceptions for tax and legal obligations, where the periods may be longer.
• Limitation of the amount of liability – it is particularly important to agree a cap (liability cap) – the maximum amount you will have to pay for all breaches of warranties in total. Without a cap, the buyer can assert claims without any limit.
• Basket and Threshold – agree a minimum threshold (e.g., CZK 50,000) below which claims are not assessed at all. This increases simplicity and reduces paperwork over minor issues.
• Disclosure Letter – an important document that is an annex to the share purchase agreement. This is where you list everything that excludes liability. Anything you disclose in the disclosure letter will not harm you – the buyer reads it and still finances the purchase, so they cannot later say they did not know.

Attorneys from ARROWS, a Prague-based law firm, will help you set these mechanisms up correctly. It is not just about coming up with numbers – it is about allocating liability fairly, ensuring the transaction is fair, and avoiding unpleasant surprises later for both parties.

Employment-law issues: The forgotten dimension

The sale of a company often means the transfer of employees to a new owner. Here, Czech law sets out specific obligations that owners often try to circumvent – with catastrophic consequences.

When an undertaking or a substantial part of it is sold, rights and obligations arising from employment relationships transfer to the new employer automatically, by operation of law. This cannot be excluded in the purchase agreement; employees transfer with all their rights, wages, and benefits.

Our specialists for you: 

JUDr. Jakub Dohnal, Ph.D., LL.M.

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Mgr. Marek Hučík

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Owners often do not like this – they try to say “employees remain with the original company” or “the buyer will choose the employees.” It is not that simple, and you face a fine of up to CZK 200,000 for breach of the information obligation under Section 12(1)(f) of Act No. 251/2005 Coll., on Labour Inspection.

The seller’s obligations include:

• Inform employees no later than 30 days in advance – employees must learn about the change of owner in time and be informed of all legal, economic, and social consequences. This obligation is imposed by . If you neglect it, employees may decide to terminate their employment without restriction and with the right to severance pay.
• Provide the buyer with all relevant information – the buyer needs to know the team composition, job positions, contracts, wages, benefits, and any issues they will be taking on.
• Ensure a proper transfer – the new employer steps into the rights and obligations of the original employer. They must ensure that transferring employees have working conditions consistent with existing employment contracts and collective agreements. They cannot unilaterally reduce employees’ rights without following statutory procedures.

It often happens that key employees leave the company during an acquisition because they do not know what will happen or they fear change. This is a huge risk. Attorneys from ARROWS, a Prague-based law firm, recommend carrying out so-called employee due diligence – identifying key people and ensuring their smooth transfer.

Most common questions on the employment-law aspects of a sale

1. Can I deprive employees of the benefits they had when the new owner takes them over?
No. When rights and obligations arising from employment relationships transfer, the new employer steps into all existing rights and obligations under the employment relationship. This means employees retain their existing working conditions, including benefits. Any changes to working conditions must be made in accordance with the Czech Labour Code (e.g., by agreement with the employee, or by notice for organisational reasons in compliance with the law).

2. What happens if an employee has no idea what is going on during the sale?
If you did not inform employees within the mandatory 30-day period before the transfer of rights and obligations, the employee may, under Section 339a(1) of the Czech Labour Code, decide to terminate employment by notice without stating a reason. The notice must be given within 15 days from the day they learned of the transfer (at the latest within 15 days from the effective date of the transfer), and the employment ends on the day preceding the effective date of the transfer of rights and obligations arising from employment relationships. In such a case, the employee is entitled to severance pay. This is unpleasant for the new owner and exposes you, as the seller, to fines.

3. Do all employees have to transfer to the new owner?
Not automatically. If the entire undertaking is transferred, all employees who work for that undertaking transfer. However, if only part of the undertaking is transferred, only those employees whose activities directly relate to the transferred part transfer with it. This must also be clearly defined and properly agreed, and it may need to be assessed whether it truly constitutes a part of the undertaking capable of independent economic activity.

Documentation and administrative pitfalls

A small thing that is often overlooked during a sale: correct, complete, and high-quality documents. As soon as the buyer sees poor documentation, it immediately signals that things are not in order in the agreements. And they start asking more questions.

Key documents you must have prepared:

• Accounting and tax returns – financial statements for the last 5 years (or longer, if applicable), all tax returns and their appendices for the duration of the limitation period for tax arrears, VAT returns, payroll reports. Everything without exceptions.
• Contracts – absolutely all contracts the company has: with customers, suppliers, landlords, banks, insurers, etc. No exceptions such as “that goes without saying”. 
• Legal documents – incorporation documents, articles of association, bylaws, shareholders’ meeting resolutions, minutes from shareholders’ meetings or managing directors’ meetings, all changes in the legal structure and documentation for filings with the Commercial Register. If there are any older processes or changes, they should also be clearly documented.
• Asset register – an inventory of all assets owned by the company: real estate, machinery, software, receivables, etc. For real estate, ownership relationships must be clear and up-to-date extracts from the Czech Cadastral Register must be available.
• Intellectual property – overviews of all registrations: patents, trademarks, industrial designs, domains, software copyright. If something is not registered, you must explain why.
• Assets and security – a list of everything that is secured, encumbered, or restricted by legal obligations. For example: is the property subject to a mortgage? Is there a creditor’s lien over it? Is there any easement?
• Employees – a complete list of employees, their employment contracts, payroll records, internal policies, non-disclosure agreements, relevant insurance documents, and registrations with the Czech Social Security Administration and health insurance companies.

ARROWS, a Prague-based law firm, can help you prepare this documentation and verify that everything is in order even before the company meets the buyer. Attention to detail here will save time and problems later.

Most common questions about preparing documentation

1. How old documentation do I really need? Up to 10 years?
As a standard, accounting records and tax returns for the last 5 years are requested. However, for tax audit purposes, the limitation period for assessing tax is generally 3 years, but it may be extended up to 10 years (e.g., in the case of a tax loss, the commencement of a tax audit, or the use of certain tax benefits). Therefore, it is advisable to have tax documentation available for a longer period as well. Some contracts may be older (especially long-term contracts with customers or landlords), so it is advisable to have them all. For legal matters, all documentation from the company’s incorporation is recommended.

2. What if I know something in the documentation is not in order?
It is better to remedy it in advance or disclose it transparently in the disclosure letter. If it comes to light later during the buyer’s due diligence and it is clear that you were hiding it, you will lose credibility and your price will be reduced. Transparency wins.

3. How much does it cost to have a lawyer review everything for us?
The price varies depending on the scope of the review and the size of the company. Typically, it is tens of thousands of Czech crowns for a comprehensive legal audit. However, it is an investment that pays off in the form of a smoother sale and a higher price.

Final summary

Selling a company is a complex process that requires thorough preparation. Owners who think it is enough to simply agree a price with the buyer and sign a piece of paper will be bitterly disappointed.

Without careful preparation for due diligence, without understanding the tax implications of choosing the transaction structure, without clear contractual allocation of liability, and without high-quality documentation, the risk increases significantly that the transaction will end badly: with a lower price, delays, or complete failure.

Our attorneys in Prague and tax advisors at ARROWS have been dealing with these issues for many years. They know what to watch out for, how to structure the sale to make it as successful as possible, and how to optimize the tax impact under Czech legislation. This is not just theoretical knowledge – it is practical experience from thousands of real-life situations.

If you want to ensure that the sale of your company is safe, that you do not risk unnecessary mistakes or penalties, or that you do not lose your negotiating position, contact the attorneys at ARROWS, a Prague-based law firm.

They will help you with the company’s legal audit, transaction structuring, preparation of all documents, and contractual arrangements. Contact us at office@arws.cz to arrange an initial consultation.

FAQ - Most common questions about selling a company

1. When should we start preparing for the sale of a company?
Ideally 6–12 months in advance. This gives you time to carry out your own internal review, fix any issues you identify, and prepare all documentation. If you are deciding to sell now and want to complete the sale within 3 months, it is possible, but the risk of mistakes increases. Contact the attorneys at ARROWS, a Prague-based law firm, as soon as possible – office@arws.cz.

2. How much will legal and tax advisory services cost?
The price varies depending on the size of the company and the scope of the required review. Typically, it ranges from tens to hundreds of thousands of Czech crowns for a comprehensive legal audit, preparation of documentation, and contractual advice. The investment pays off when good preparation allows you to sell at a higher price or without unnecessary delays and complications. 

3. What happens if a legal issue I did not know about arises during the sale?
That is exactly why an upfront review is important. If a surprise comes up during the buyer’s due diligence, the buyer will reduce the offer or pull away from the transaction. However, if you know about the issue in advance and address it properly (either you resolve it, or you disclose it transparently in the disclosure letter), you are better prepared to negotiate the terms. 

4. Can I “keep” employees for myself during the sale?
If there is a transfer of an undertaking, employees transfer to the new owner automatically—this is provided by law (specifically Section 338 et seq. of the Czech Labour Code). You cannot prevent this. If only part of the business is sold (an asset deal), only the employees whose work directly relates to the transferred part move with it. All details regarding the transfer of employees must be clearly agreed, and employees must be properly informed. 

5. What does “earn-out” mean, and should I agree to it?
An earn-out means that part of the purchase price will be paid to you only after a certain period of time (e.g., 2–3 years), and its amount depends on how the company performs under the new owner. For example: 80% of the price on the closing date, 20% after one year if the company reaches a certain profit. Owners do not welcome this because the uncertainty lasts a long time. It is usually better to negotiate 100% payment on the closing date and secure any potential liability through an escrow account (the money is held in a special account and released gradually if nothing happens). Contact the attorneys at ARROWS for detailed negotiations – office@arws.cz.

6. Do I have to inform my bank about the sale if there is a mortgage on the property?
Yes. If there is a mortgage on a property owned by the company, the bank must consent to the sale. The bank wants to know that the mortgage will be repaid from the sale proceeds (or refinanced) and that its security interest will remain protected. Without the bank’s consent, you cannot effectively proceed with selling an encumbered property. Discuss this with your bank and make sure all formalities are in order. 

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Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter, based on the legal status as of 2026. Although we take the utmost care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client security we maintain professional liability insurance with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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
• Taxation of Business Interest Transfers in the Czech Republic in 2026
• How to Protect Yourself as a Company Executive in Czechia (Before It’s Too Late)
• Managing Director and Employee Concurrency in Czech Law: Risks and Setup 2026