Selling a Company: From Letter of Intent to Closing Key Pitfalls

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
13.4.2026 | ARROWS law firm

Selling a company is one of the most complex business transactions, involving a lengthy and structured process. From the initial expression of interest (Letter of Intent) to the final transfer of ownership (closing), each phase carries specific risks that can complicate the transaction. This article will guide you through the entire journey and highlight the key pitfalls.

The photograph shows a lawyer discussing the topic of selling a company.

What a Letter of Intent is and why it is not just a piece of paper

A Letter of Intent — in Czech, a “dopis o záměru” — is also referred to in practice as a Memorandum of Understanding (MOU) or a Term Sheet. It is the first formal document in which the buyer expresses a structured interest in acquiring a company under specific terms. Unlike informal negotiations or a verbal agreement, an LOI puts the basic parameters of the transaction on paper and thus creates a checklist for the next steps.

However, the owner or manager of the company must clearly understand one critical fact: an LOI is typically non-binding as to the intention to enter into the main transaction, but some of its parts are legally highly binding. This is where beginner mistakes often happen.

For example, the seller may not realize that by signing the LOI they are accepting legally binding obligations relating to confidentiality (NDA), exclusivity, or reimbursement of costs associated with the review. If the seller then starts negotiating with other buyers or discloses confidential information, the buyer may sue them for breach of these obligations, under the terms agreed in the LOI.

What an LOI must contain

Under Czech legal standards and common M&A practice in the Czech Republic, an LOI should include at least the following eight elements:

Identification of the parties. It must be precisely defined who the buyer is and who the seller is — with full identification details (name/company name, Company ID No., registered office/residential address, contacts). An error here leads to uncertainty as to whom the rights and obligations actually apply.

Subject matter of the transaction. It is essential to clearly define whether it is a Share Deal (sale of ownership interests or shares in a legal entity) or an Asset Deal (sale of individual assets without transferring the legal entity). Each type carries different tax and legal consequences under Czech legislation. The seller should also specify which key assets, or which company, are the subject of the sale.

Indicative purchase price and payment structure. The LOI usually states a price range rather than an exact price. At the same time, it defines how the price will be paid — whether as a one-off payment on the closing date, whether through seller financing in instalments, or whether part of the price will be tied to the company’s future performance (an earn-out mechanism).

Transaction conditions (Conditions Precedent). The LOI must define the key conditions that must be met before the final completion (closing) — for example, successful completion of legal and financial due diligence, obtaining clearance from the Office for the Protection of Competition (ÚOHS, the Czech competition authority) for larger transactions, verification of the absence of a material adverse change (MAC) in the company’s performance, etc.

Scope and timeline of due diligence. The LOI should include an agreement on which areas will be reviewed (legal, financial, technical, operational, HR), how long the review will take (typically several weeks, e.g., 2–6 weeks), who will have access to confidential documents, and who will bear the costs.

Confidentiality and exclusivity. This is precisely the type of arrangement that is almost always formally binding. Confidentiality means that the parties undertake not to disclose information about the ongoing negotiations and about the other party. Exclusivity means that the seller undertakes, for the agreed period (typically 30–90 days, but it may be longer), to negotiate exclusively with this buyer and not to negotiate with competitors. Breach of this obligation may lead to a major dispute and a claim for damages.

Validity and termination of the LOI. The LOI should clearly state how long it is valid (typically 30–90 days from signature). It should also include a clause allowing early termination and an express statement that, except for the binding parts (e.g., confidentiality, exclusivity, costs), the LOI is not legally binding with respect to the obligation to enter into the main agreement.

Practical risks in the LOI phase

Company owners often encounter the following mistakes:

Most commonly, they underestimate the importance of the terms negotiated in the LOI. If, for example, the LOI does not specify which documents the buyer will be allowed to see during due diligence, the buyer may later request access to employees’ internal emails, communications with the tax advisor, or reports that the seller considered sensitive. The seller then faces a choice: either refuse and risk the buyer walking away, or give in and disclose information that may then be misused.

A second typical mistake is ignoring exclusivity clauses. The seller thinks the LOI is only an “indicative piece of paper” and continues negotiations with other buyers. The buyer finds out, and if exclusivity was agreed, they have a legal claim for damages because the seller breached a contractual obligation. Such a dispute can last for years and cost significant sums.

The third risk is timing. If the LOI does not set specific deadlines for individual steps (submission of offers, commencement of due diligence, execution of the SPA), the transaction drags on, the seller remains stuck in uncertainty, and competing offers may disappear.

Most common questions about the Letter of Intent and its legal status

1. Is an LOI always non-binding?
No. As a general rule, the offer itself and the price are non-binding in terms of the obligation to enter into a future purchase agreement, but clauses relating to confidentiality (NDA), exclusivity, a prohibition on negotiating with third parties, and a prohibition on disclosing information about the ongoing negotiations are almost always legally binding. The seller is therefore bound even after signing the LOI, and breaches of these obligations can be enforced in court, including claims for damages.

2. What happens if we discover material issues in the accounting during the LOI phase?
If, during early-stage negotiations, it is discovered that the financial statements are incorrect or misleading, the buyer has the right to distance themselves from the intention to complete the transaction — because the LOI usually contains an explicit non-binding statement (except for the binding parts). The seller must then decide whether to correct the errors, reduce the price, or withdraw from the transaction.

3. How long should the LOI phase last?
Typically several weeks, for example 2–4 weeks. During that time, the parties agree on the basic parameters, sign an NDA, sign the LOI, and begin preparations for due diligence. If the LOI phase takes longer, it is a signal that the parties do not agree on key issues.

Our attorneys in Prague at ARROWS advokátní kancelář can help you structure the LOI so that your interests are clearly defined and the seller avoids the pitfalls typical of this phase. Contact them at office@arws.cz.

Due diligence: Hidden risk becomes visible

Due diligence is a systematic legal, financial, operational and tax review of the target company carried out by the buyer (and its advisers) in order to identify all material risks, liabilities, legal defects and opportunities. It is the most important phase from the buyer’s protection perspective—and at the same time the most demanding phase from the seller’s perspective.

During due diligence, the buyer “turns over every stone” and asks about matters it did not originally consider. The result is a list of findings, uncertainties and risks—often summarised in a due diligence report—which then forms the basis for negotiations on the price and the seller’s contractual warranties.

Phases and scope of due diligence

A typical due diligence takes several weeks, usually 2 to 6 weeks, and includes several parallel reviews:

Legal due diligence. The buyer’s legal team reviews: the company’s registration in the Commercial Register, any disputes in court and enforcement registers, contractual relationships with customers and suppliers (in particular so-called change of control clauses—provisions that allow the counterparty to unilaterally terminate the contract if the ownership structure of the target company changes), employment documentation, employee records, verifies the ownership structure, the existence of pledges over shares or assets, compliance with all relevant legal obligations, and similar matters.

Financial due diligence. The buyer’s financial adviser reviews in detail the last 3–5 years of accounting and audit statements, tax returns, invoices and expenses, revenue structure, profitability, working capital and cash flow. The aim is to verify whether the financial statements are accurate and whether the financial data aligns with the assumed value of the company.

Tax due diligence. The tax adviser analyses the company’s tax records—whether it has tax arrears, whether tax returns were filed correctly, whether there are risks of tax audits and additional assessments, what the company’s tax position is abroad, etc. This phase may take several weeks for complex structures.

Operational and technical due diligence. Infrastructure, IT security, process quality, key employees, supply chains and production capacity are assessed.

HR due diligence. The composition and stability of management, key employees, their employment contracts, benefits, potential conflicts of interest and risks associated with the loss of key personnel are reviewed.

Although all these reviews run in parallel, the central place for their coordination is usually a Virtual Data Room (VDR)—a secure online platform where the seller uploads all relevant documents and where it is possible to track who worked with which documents and when.

Why due diligence drags on and the cost of delays

One of the most common sources of frustration is the fact that the buyer systematically extends deadlines during due diligence and unilaterally shifts timelines. The seller knows that if it says “no”, the buyer will walk away and look for another target company. Sellers are therefore more willing to make concessions. In practice, the originally agreed due diligence period in the LOI (e.g., 30–90 days) is on average extended to several months.

This means the seller is left in uncertainty and cannot negotiate with other buyers. Employees start speculating, customers notice the nervousness, and overall the company’s market position may weaken.

The second problem lies in so-called scope creep—the buyer gradually requests more and more documents and information than originally agreed. What may have seemed like a straightforward review can turn into an obsessive analysis. The seller suddenly has to obtain historical contracts more than 10 years old, accounting calculations from a period when the company had a different accountant, or internal documents about decisions that were never recorded in writing.

The third danger is unintended disclosure of sensitive information (unintended disclosure) —during due diligence, the buyer and its advisers gain access to trade secrets, specific sales strategies, customer lists with their profitability, labour costs, etc. If the transaction ultimately fails, the buyer (or its adviser) will have the most sensitive information about a competitor in its hands. Although an NDA exists, enforcing it in practice is difficult and time-consuming.

Most common questions about the Due Diligence process

1. Who pays the costs of due diligence?
Typically the buyer. The seller pays for preparing documents and communication, but the buyer pays the fees of lawyers, auditors and advisers, because the review primarily serves the buyer—it protects the buyer from making a mistake in the acquisition.

2. What if the buyer finds a problem during due diligence that the seller did not know about?
If the problem objectively exists (e.g., hidden debt to the state, an unresolved court dispute, incorrect accounting), the seller is liable to the extent and under the conditions agreed in the share purchase agreement. However, if the problem was objectively hidden and the seller could not reasonably have known about it, the seller may defend itself by arguing that it did not have to know all defects. This is precisely why it is important to clearly agree in the share purchase agreement which areas the seller guarantees (i.e., warrants) and which it does not.

3. As the seller, can I refuse to provide certain documents on the grounds of trade secrets?
You can, but you risk the buyer withdrawing from the transaction. In practice, it is agreed that sensitive documents (e.g., internal valuations, detailed calculations, a list of top customers) may be viewed only by the buyer’s lawyers and finance professionals under a stricter NDA, not by all members of its team.

Lawyers from ARROWS, a Prague-based law firm, can help you prepare your company for the due diligence phase—ensuring that all your documents are in order, that there are no surprises, and that you understand what risks may arise. Contact office@arws.cz.

Purchase price determination mechanisms: Locked box versus closing accounts

Once due diligence is completed and the parties have agreed in principle that the transaction will proceed, they must decide on the mechanism by which the final purchase price will be calculated. This decision has long-term legal and financial consequences and often becomes the subject of the biggest disputes.

In practice, two main types of mechanisms are used: Locked Box and Closing Accounts (also called Completion Accounts).

Locked box mechanism

Under the locked box mechanism, the purchase price is based on the parties’ agreement using information known before the date of signing the acquisition agreement. For example, the parties may say: “The value of the company is CZK 50 million as of 30 June 2025, based on the financial statements as of 30 June 2025. We fix this price and it will not change, regardless of what happens later.” On the signing date, the purchase price is therefore fixed by the agreement and does not change thereafter. The entire purchase price is typically payable on the transaction completion date (closing).

The seller therefore has no entitlement to any top-up of the purchase price, but on the other hand it is also not exposed to the risk of the price decreasing.

To avoid a situation where the seller manipulates assets in the period between signing and closing (e.g., “pulling out cash”, reducing the number of employees, or removing high-quality customers), acquisition agreements with a locked box mechanism contain strict provisions on how the seller must not manage the company during the so-called “interim period”. 

Closing accounts mechanism

By contrast, the closing accounts mechanism is based on the principle that the final price is calculated only after closing, based on the company’s actual position as of the transfer date (the “closing date”). The parties agree on an indicative price and on the methodology for how the price will be adjusted. 

Example: The parties agreed on a purchase price of CZK 50 million on the assumption that the company would have working capital of CZK 5 million. At closing, it is determined that working capital is only CZK 4 million. The buyer therefore pays only CZK 49 million, but if the working capital were CZK 6 million, the buyer would pay CZK 51 million.

The closing accounts mechanism is considered a more flexible model because it reflects the company’s actual position as of the closing date, rather than historical figures. At the same time, however, it introduces uncertainty into the post-closing period — the seller does not know exactly how much they will receive. Any refund or top-up is calculated only later (typically within 60–90 days after closing) and becomes due later.

Locked box vs. closing accounts: When to choose which

The locked box mechanism works well where the business is stable and there is low volatility in working capital (e.g., industrial manufacturing with predictable seasons). Sellers like it because they know the price immediately after signing. Buyers like it if they trust that the seller will comply with the agreement. Another advantage is lower administration and lower costs — there is no need to prepare financial statements as of the closing date (so-called closing balance sheets).

The closing accounts mechanism is suitable where working capital is highly volatile (e.g., e-commerce with strongly seasonal production), or where the financial statements are not entirely clear. Buyers like it because they are not “surprised” — they can see exactly what they are buying. Sellers, in turn, like it when they know that the physical condition of the assets may change between signing and closing (e.g., due to seasonal inventory purchases).

In the Czech Republic and Central Europe, the closing accounts mechanism dominates in practice — in approximately 60–70% of transactions. This is because both sellers and buyers prefer transparency and the actual position as of the closing date, without having to worry about manipulation.

Most common questions about purchase price determination mechanisms

1. What happens if working capital changes in the period between signing and closing?
If a locked box mechanism is agreed, the price does not change — the seller has no choice but to hope that the agreement will be complied with and that assets will not be extracted from the business. If a closing accounts mechanism is agreed, the price shifts — the buyer pays more or less depending on the actual position as of the closing date.

2. Who reviews the closing accounts calculation?
Typically both parties — the buyer will have the calculations reviewed by their auditor, and the seller by theirs. If they cannot agree, common practice is for an independent auditor (an “independent accounting expert”) to carry out a binding determination, which is then final. The costs are usually shared by both parties.

3. How long after closing is the purchase price adjustment calculated?
Typically, 60–90 days are allowed for the calculation. If there is a dispute over the calculation methodology, it may take up to 6 months. This must be clearly agreed in the share purchase agreement to avoid uncertainty.

Our attorneys in Prague at ARROWS can help you choose the right mechanism given the nature of your business and negotiate the relevant clauses so that they protect your interests. Contact us at office@arws.cz.

Signing and closing: Differences that matter

One of the most common misunderstandings in M&A terminology is that managers and owners confuse the signing of the share purchase agreement (signing) with the transfer of ownership (closing). Both moments are important, but they are of a completely different nature. Understanding the difference between them is essential to protecting your rights.

Signing: The moment the agreement becomes binding

Signing is the moment when both parties sign the Share Purchase Agreement (SPA) — the final, legally binding document for the acquisition of the company. From the moment of signing, the agreement becomes legally binding on both parties. This means that neither the seller nor the buyer can simply walk away without legal consequences. If the buyer were to say now, “I’ve changed my mind,” the seller could sue for damages or seek specific performance.

As a rule, signing takes place in person on “signing day” — a pre-planned day when everyone involved meets (physically or online) and signs the agreement. If there are multiple parties to the signing (e.g., banks or secured creditors), signatures may be collected progressively, via so-called “circular” signing through digital platforms.

On the signing date, the final price is usually not paid — it is only a legal formality. Payments and the actual transfer of assets take place only on the closing date.

Closing: The moment of the actual transfer

Closing is the day on which the actual and legal transfer of the shares to the buyer takes place and the purchase price (or part of it) is paid. On the closing date, the buyer takes over:

  • Share or stock certificates or other documents evidencing ownership.
  • Access credentials to bank accounts and IT systems.
  • Keys to the premises (if it is a physical business).
  • A list of all liabilities being assumed.

At the same time, the seller receives payment of the purchase price (again — in line with the mechanism agreed).

There may be a significant time gap between signing and closing — commonly several weeks to months. During this period, certain conditions must be satisfied (so-called Conditions Precedent — CP), without which closing will not take place.

Conditions precedent: Obstacles on the way to closing

Typically, the parties agree between signing and closing that closing will take place only if certain conditions are met:

Regulatory approvals — e.g., clearance from the Czech Competition Authority (ÚOHS), especially for transactions exceeding the relevant turnover thresholds, approvals from a financial regulator, the public health authority, etc.

Third-party consents — e.g., the landlord’s consent to the transfer of a lease, or a bank’s consent to the transfer of loan obligations.

Registration in the Commercial Register — so that the change of ownership or other relevant changes are recorded.

Absence of a MAC (Material Adverse Change) — to ensure that nothing fundamentally negative happens to the company (e.g., loss of a key customer, litigation, an accident, etc.) that would have a material impact on its value.

Fulfilment of due diligence undertakings — so that the buyer can close the transaction without concern and the seller remedies any defects identified during the review.

If any of the conditions is not met and cannot be met, the buyer (or the seller, depending on what is agreed) has the right to withdraw from the transaction without legal consequences (except for those agreed for such a case). However, the party for whose benefit the condition is agreed may decide to waive it.

Practical risks of the interim period

The interim period between signing and closing is one of the riskiest periods for both parties. The seller remains the owner of the company, but in practice can no longer fully control it, because the buyer expects to be involved in key decisions or to be informed of material changes. The situation is therefore uncertain.

Typical risks:

Employees are uncertain. They do not know who their manager will be, whether they will be laid off, or whether their contracts will change. This can lead to staff turnover and a drop in productivity.

Customers are getting used to the new owner. If the buyer starts “reforming” the company before closing (changing processes, cutting costs), customers become uneasy and start looking for alternatives. The risk is particularly high in a business where there is a personalised relationship with key customers.

Financing becomes more complicated. If the buyer finances the acquisition through a bank, they should have the loan commitment in place already on the signing date. If not, during the interim period their financiers learn more about the company and may change their decision. In practice, this is a common reason why transactions fail shortly before closing.

The seller tries to negotiate better terms. If, during the interim period, it is discovered that something is not in order (and a closing condition allows the buyer to walk away), the buyer will start renegotiating to reduce the price. As a result, conflict escalates and the atmosphere deteriorates.

MAC (Material Adverse Change) clause. The buyer has the right to distance themselves from the transaction if something “materially adverse” happens to the company — loss of a key customer, a drop in revenues below assumptions, new litigation, etc. The problem is that the definition of a MAC is legally uncertain — it depends on the specific wording in the SPA and, where relevant, on a court’s interpretation of what is “materially” adverse. This opens the door to legal disputes if the buyer attempts to invoke a MAC and withdraw from the agreement.

Most common questions about Signing and Closing

1. As the seller, can I take a few documents before closing takes place?
Formally, if the buyer does not allow it — no. After the SPA is signed (on the signing date), the buyer expects to have factual control over the company, even though they have not yet taken legal ownership. If the seller behaves like the owner (removing items, changing processes, entering into significant contracts outside the ordinary course of business), the buyer may view this as a breach of contract and may negotiate a price reduction or even withdraw.

2. What if the buyer does not have the money on the closing date?
This is one of the most common scenarios in which a transaction fails. If it is agreed that the buyer is obliged to pay in full as of the closing date and they do not pay, the seller can enforce performance through the courts and claim a contractual penalty (if agreed), but this may take years. In practice, it is therefore usually agreed that closing cannot take place without actual payment of the purchase price; if the buyer cannot pay, the transaction is automatically terminated, potentially with the seller’s right to a contractual penalty.

3. Who takes over the employees — on the signing date or on the closing date?
Legally, employees are transferred on the closing date, because that is the day when ownership of the company changes or part of an undertaking is transferred. Under Section 338 of Act No. 262/2006 Coll., the Labour Code, as amended, the rights and obligations arising from employment relationships transfer to the receiving employer on the effective date of the transfer of the employer’s activity or part thereof. Before such a transfer, both the original and the receiving employer have a duty to inform and consult employees or their representatives about this fact. In practice, from signing onwards the buyer speaks with key employees, gets to know them, and begins to “take them over” de facto as well. If an employee decides to leave during the interim period, it is a problem — which is precisely why retention bonuses are commonly agreed in practice to motivate employees to stay.

The attorneys from ARROWS, a Prague-based law firm, will help you set up the interim period so that it runs as smoothly as possible and there are no last-minute surprises. We will ensure that all conditions are clearly agreed and that you know what is expected of you at every stage. Contact office@arws.cz.

Post-closing: Integration confusion and hidden liabilities

Once closing has taken place and the buyer becomes the legal owner of the company, many owners think their obligations are over. Wrong. The post-closing phase is in fact very important for the seller, for several reasons.

Seller warranties and indemnification

In a typical purchase agreement, the buyer requires a number of representations and warranties under which the seller warrants that certain matters about the company are true. Examples: “The Company has no hidden debts,” “All tax returns have been filed on time and correctly,” “There are no pending disputes.”

If it is later discovered, after closing, that any of these statements was not true, the buyer is entitled to indemnification — i.e., financial compensation. Indemnification is often structured so that the seller has an escrow holdback — part of the purchase price is not paid on the closing date but is held in escrow with a third party (e.g., an attorney or a bank) for a period typically of 12–24 months.

If, during that time, the buyer discovers an issue that the seller warranted, the buyer can claim compensation from the escrow.

Example: The seller warranted that the company has no tax arrears. Six months after closing, it is discovered that the company has a tax debt of CZK 2 million that no one noticed. The buyer turns to the escrow and withdraws CZK 2 million as compensation. The seller therefore effectively loses this part of the purchase price.

The problem is that sellers often underestimate the relevance of these warranties and sign them without thorough review.

The attorneys from ARROWS, a Prague-based law firm, will help you ensure that your representations and warranties are limited as much as possible to facts you can genuinely warrant. Common solutions include:

Basket — a minimum loss threshold for indemnification (e.g., no indemnification at all up to CZK 100,000, but once the loss exceeds this threshold, either the entire amount is indemnified, or only the portion exceeding the threshold).

Cap — the maximum amount of indemnification (e.g., indemnification up to 10% of the purchase price).

Sunset clause — warranties expire after a certain period (e.g., after 24 months); however, it is usually agreed that tax warranties last for the tax assessment limitation period (typically 3 years, in certain cases up to 10 years), or that legal warranties last for the limitation periods under the Civil Code.

Transfer of employees and employment-law risks

One of the trickiest aspects of post-closing is the transfer of employees. In a share deal (sale of shares), all employees are automatically taken over by the buyer, who becomes the new employer of the legal entity — their employment contracts remain in force and all rights and obligations towards them transfer to the buyer, to the extent provided by the Labour Code (Section 338).

Under Section 338a(1) of Act No. 262/2006 Coll., the Labour Code, as amended, employees (or their representatives) must be informed about the transfer of rights and obligations from employment relationships in advance, no later than 30 days before the effective date of the transfer. If employees are not informed in time, a fine may be imposed under Act No. 251/2005 Coll., on Labour Inspection, as amended, of up to CZK 500,000 for a legal entity.

The second critical phase: working conditions may be adjusted within two months after closing. Under Section 339 of Act No. 262/2006 Coll., the Labour Code, as amended, if, in connection with the transfer of employees, working conditions deteriorate, an employee may terminate the employment relationship with immediate effect within 2 months from the effective date of the transfer.

Importantly, the buyer should ensure that the transferred employees have fair and comparable working and remuneration conditions to the buyer’s core employees (if the buyer is already an operating company with its own employees).

Typical risk: The seller believes that employees are “part of the sale” and that the buyer will “deal with them”. In reality, however, legal liability for breaches of employment-law obligations also falls on the seller during the period when the seller already knew that the transfer would take place. If the seller acted negligently or dishonestly, the buyer may later sue the seller.

Most common Post-Closing questions

1. What if, after closing, it turns out that the seller lied about revenues?
If this is agreed in the representations and warranties (and it should be), the buyer is entitled to claim indemnification from the escrow or directly from the seller. The amount of compensation depends on the extent to which the business was “damaged” and what the buyer’s actual loss is. In practice, this is the most common reason for escrow claims.

2. How long am I liable for old accounting errors?
Direct liability for defects in the transferred interest (so-called “warranties”) is limited by the purchase agreement, typically to 12–24 months, with longer periods (e.g., 3–10 years) for tax matters, taking into account the time limits for tax assessment under Act No. 280/2009 Coll., the Tax Code, as amended.

Indirect liability of the seller for the accuracy of the accounting or other information may also arise from civil-law liability for damages. In an Asset Deal (sale of individual assets), the seller’s liability for defects in those assets is governed primarily by the Czech Civil Code.

3. Can I, as the seller, participate in the integration of the company and make sure the buyer does not ruin it?
Formally, no — after closing, the buyer is the owner and has the right to manage the company as it sees fit. In practice, however, this is addressed through earn-out arrangements, or by the seller remaining as a consultant or a member of the supervisory board for an agreed period. These arrangements must be carefully negotiated in the SPA and any follow-on agreements.

The attorneys from ARROWS, a Prague-based law firm, can help you prepare a post-closing strategy to keep your risks to a minimum. We will ensure that the escrow is structured fairly and that your liability time horizon is clear. Contact us at office@arws.cz.

Earn-out: When the parties cannot agree on the price

In practice, it very often happens that the seller and the buyer have completely different views on what price the company being sold should be valued at. The seller sees high potential, an upward revenue trend, and convincing plans. The buyer, however, wants assurance that it will work out and is not willing to pay the full price without proof. The solution is an earn-out mechanism.

How an earn-out works

An earn-out is a form of arrangement under which part of the purchase price is tied to the company’s future financial performance after its sale. Instead of the buyer paying the entire price on the closing date, the buyer pays:

  • A base portion (typically 60–70% of the price) — paid immediately.
  • A variable portion (typically 30–40% of the price) — paid later if the company achieves the agreed targets.

Example: You value the company at CZK 100 million. The buyer pays CZK 70 million on the closing date. The remaining CZK 30 million is paid depending on revenues and profitability over the next 12–24 months. If the company meets the targets (e.g., revenues in the amount of CZK 50 million), the remaining CZK 30 million is paid. If not, less is paid, or nothing.

Duration of the earn-out period

The earn-out period typically lasts 12–36 months, most commonly 12–24 months. The seller would like the period to be as short as possible (so the earned money is received sooner), while the buyer prefers a longer period (to have time to implement changes and to see whether the investment paid off).

Risks and conflicts

The earn-out mechanism seems simple, but in practice it is highly conflict-prone. Typical issues:

Different visions of development. The seller believes the targets will be achieved easily. The buyer knows it will have to make investments and that the money will not come immediately. The result is that the targets are not met and the seller complains that the buyer “sabotaged” it.

Accounting manipulation. The buyer has an incentive to reduce profits (to have higher investment depreciation, a lower tax burden, etc.), which may lead to the earn-out targets not being met. The seller then suspects unfair practices.

Information asymmetry. The seller is no longer in management and does not have full access to information about performance. When reviewing financial statements, the seller may feel excluded. Suspicion and distrust arise.

Seller intervention. To ensure that the targets are met, the seller tries to interfere with the company’s operations. But the buyer sees this as “interference” and the conflict escalates.

The solution is for the earn-out agreement to be drafted as detailed and specific as possible, including:

  • A clear definition of the metric and the calculation method.
  • A clear definition of the period over which the metrics are assessed.
  • The seller’s access to accounting records.
  • A mechanism for how to proceed if there is a disagreement about the calculation (usually a determination by an independent auditor).

FAQ: Most common questions about selling a company from the LOI to post-closing

1. How long does the entire process of selling a company take, from the first contact with the buyer to closing?
A standard M&A transaction usually takes 6 to 12 months from the decision to sell to the final settlement. The timeframe varies depending on the company’s complexity, the number of interested buyers, and market conditions. Typically, the LOI phase takes 2–4 weeks, due diligence 2–6 weeks (often longer), SPA negotiations 4–8 weeks, and the interim period between signing and closing several weeks to months. If you are not sure how long your specific sale will take, contact office@arws.cz and request a forecast.

2. What are the typical costs of selling a company?
Costs include legal fees (typically 2–5% of the purchase price, depending on the complexity of the transaction), fees for M&A advisers or brokers (3–7% of the purchase price), fees for auditors and tax advisers (in the hundreds of thousands of CZK, e.g., CZK 50,000–500,000 and more depending on scope), and the costs of preparing documentation and conducting reviews. Overall, it is assumed that costs will amount to 5–15% of the purchase price. Is that little? Does it seem like a lot? It depends on what share you have in the transaction. The attorneys from ARROWS, a Prague-based law firm, can help you optimize these costs. Email office@arws.cz.

3. What happens if, during the interim period (between signing and closing), the buyer discovers something serious and wants to withdraw from the transaction?
That depends on the contractual wording—specifically, how the “MAC” (Material Adverse Change) clause is agreed and what other closing conditions have been negotiated. Typically, the buyer cannot withdraw at will—if there is no expressly agreed termination right or if the closing conditions (Conditions Precedent) have not failed, the buyer must complete the transaction. However, if a MAC clause has been agreed and something truly fundamental happens to the company (e.g., a loss of half of its revenues), the buyer may, subject to the agreed conditions, have the right to withdraw from the transaction. This, however, usually leads to litigation over the validity of the withdrawal. The attorneys at ARROWS, a Prague-based law firm, can help you negotiate a MAC clause so that it is fair to both parties and minimizes uncertainty. Contact us at office@arws.cz.

4. What are the most common surprises that arise during due diligence?
The most common surprises include hidden tax liabilities (unpaid social security and health insurance contributions, incorrectly remitted taxes), unresolved disputes with employees or customers, improper accounting (e.g., intentional or unintentional errors in financial statements), problematic change of control clauses in key customer contracts, employment-law issues under Czech legislation (e.g., defective employment contracts, breaches of occupational health and safety obligations), outdated or incomplete lease agreements, or non-inventoried assets. The attorneys at ARROWS, a Prague-based law firm, can help you identify such issues in advance during the “pre-due diligence” phase, when you still have time to resolve them without pressure. Reach out at office@arws.cz.

5. As the seller, can I borrow money from the buyer to finance the purchase?
Yes—this is called “seller financing” or “vendor financing.” In essence, the seller lends the buyer part of the price, which is then repaid from the company’s cash flow over the following years. This requires very careful legal and financial structuring, because it increases the seller’s risk—if the company does not perform well, the buyer may have no funds from which to repay. At the same time, the seller gives up the capacity to invest those funds into another business. The attorneys at ARROWS, a Prague-based law firm, can help you structure such an arrangement and protect your rights. Write to office@arws.cz.

Disclaimer: The information contained in this article is for general informational purposes only and serves as a basic guide to the issue as of 2026. Although we strive for maximum accuracy, laws and their interpretation evolve over time. We are ARROWS Law Firm, a member of the Czech Bar Association (our supervisory authority), and for the maximum security of our clients, we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of the regulations and their application to your specific situation, it is necessary to contact ARROWS Law Firm directly (office@arws.cz). We are not liable for any damages arising from the independent use of the information in this article without prior individual legal consultation.

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