Selling a business

The decision to sell a business is one of the biggest steps in an entrepreneur's life. Whether you are selling your business because you are retiring or looking for a strategic investor for further development, you always want the entire process to run smoothly and safely.

For company owners, this can be a unique and complex experience – they often encounter a range of procedures and documents for the first time when they are about to evaluate the results of their many years of effort. This article offers a clear but professional step-by-step guide to selling a limited liability company (s.r.o.) in the Czech Republic.

It also highlights the practical legal steps, the importance of professional assistance and tips on how to minimise risks – so that you can sell your company on the best terms and with peace of mind.

Author of the article: ​ARROWS (JUDr. Jakub Dohnal, Ph.D., LL.M., JUDr. Kateřina Müllerová, office@arws.cz, +420 245 007 740)

Thorough preparation of the company for sale

Thorough preparation is key to a successful sale of a company. The better prepared the company is, the fewer surprises (and potential problems) will come to light during negotiations with the buyer. Experts advise carrying out a ‘mock due diligence’ – before starting the sale process, go through all important areas of the company and put the documents in order.

It pays to resolve and rectify any issues in advance, because any risk identified by the buyer's advisors during the due diligence process may result in a reduction in the offered price.

The basic steps of preparation include documentation and financial health: Have complete and up-to-date financial statements, annual reports, tax returns and other economic documents. Potential buyers do not want to ‘buy a pig in a poke’ – i.e. buy a company blindly. On the contrary, by providing comprehensive and clear information about your financial management, assets, contracts with suppliers and customers, and any ongoing disputes, you will gain credibility.

At the same time, you will minimise the risk of future claims by the buyer, who could argue after the transaction has been concluded that they did not have sufficient information about the state of the company. It is therefore worthwhile to compile all documents and organise them, for example, in a secure data storage facility (virtual data room), to which serious interested parties will have access after signing a confidentiality agreement.

It is equally important to eliminate weaknesses and legal obstacles. Before the sale, try to resolve any contentious issues, such as ongoing legal disputes, outstanding receivables or unclear property relations. For example, if the company is facing a legal dispute with a former employee or has outstanding liabilities, the buyer will discover this during the due diligence process, which may reduce the value of the company.

An external legal consultant can identify these weaknesses and recommend solutions. It is also advisable to review the internal organisational structure and processes – the company should be able to function without the direct involvement of the current owner. Clearly define the roles of management and employees and set up procedures to ensure that the business runs smoothly even if someone else takes over the management. This will increase the attractiveness of the company to buyers.

As part of your preparations, also consider the structure of the transaction itself. Clarify whether you are selling the entire company or just a part of it, and whether you are selling it in the form of a share deal or an asset deal. You can either sell your business share (or shares, in the case of a public limited company) or agree to sell specific assets of the company (property) instead of a share.

For most medium-sized and larger companies, it makes sense to sell a share (share deal) – the buyer takes over the entire company, including all rights and obligations. In other cases, it may be appropriate to spin off certain parts of the business in advance (e.g. ancillary operations or real estate) and sell them separately if the whole would not be as attractive to the buyer.

The right transaction structure will affect the amount of tax and the administrative complexity of the transfer, so it is advisable to discuss this strategy with experts at the outset.

Legal and financial due diligence (company review)

Once the company is ready and a serious buyer has been found, it is time for due diligence, i.e. an in-depth review of the company being sold. Due diligence is a detailed review of all aspects of the company by the potential buyer – from financial statements and legal matters to the technical condition of the business.

The buyer's goal is to verify the actual condition and value of the company, identify potential risks and ensure that the information provided by the seller corresponds to reality. From the seller's point of view, this is a demanding phase, but it must be completed successfully in order for the transaction to move towards completion.

The scope of due diligence depends on the size and nature of the company, but usually includes several areas: financial review (audit of accounting, financial results, cash flow, receivables and payables), legal review (review of all contracts, corporate documents, licences, labour relations, ongoing disputes, etc.), tax review (checking tax compliance and identifying potential tax risks) and operational and technical review (assessment of production processes, IT systems, product/service quality, etc.).

For larger transactions, the business side is also analysed – for example, the company's market position, customer contracts, marketing strategies, etc. This gives the buyer a complete picture of the company.

Due diligence can be a very intense and stressful period for the company owner. It is common for buyers (with the help of their lawyers, auditors or advisors) to raise dozens of additional questions and requests for documents. It is therefore important to prepare carefully, as mentioned above – having the necessary documents ready in advance will significantly facilitate and speed up the fulfilment of the buyer's requirements.

In practice, all documents are usually shared electronically in a virtual data room. Access to sensitive data should only be granted after signing a non-disclosure agreement (NDA) with the buyer. An NDA legally binds both parties to keep the information obtained confidential, thus protecting the company if the sale does not go through.

During due diligence, previously hidden problems may come to light that the buyer will be sensitive to, such as unclear intellectual property rights, missing regulatory approvals, environmental liabilities, disputes with employees or unusually high debt. The seller must be prepared to explain such findings or take prompt remedial action, or accept that the buyer will request an adjustment to the terms of the transaction.

The results of due diligence often affect the final purchase price and terms of sale. It happens that after the review, the investor submits a binding offer with a lower price than their original indicative offer if they have discovered significant risks or shortcomings.

In extreme cases, if fundamental problems arise and the parties cannot agree on a solution, the sale negotiations may fail. However, with professional support, most obstacles can be avoided or resolved to the satisfaction of both parties.

Share transfer agreement (sale agreement)

Once both parties have completed the due diligence phase and agreed on the basic parameters of the transaction (in particular the price and main terms and conditions), the contractual finalisation of the sale can take place. For the sale of a limited liability company, a share transfer agreement is prepared, or a more comprehensive share purchase agreement for larger transactions with multiple terms and conditions. This agreement is a key document that sets out in detail the rights and obligations of both the seller and the buyer.

From a legal perspective, a share in a limited liability company can only be transferred on the basis of a written agreement with officially certified signatures of the parties. In practice, this means that the signatures of both the seller and the buyer on the agreement must be officially certified. Without this formality, the transfer is not valid. The law also distinguishes between the parties to whom the share is transferred: if the share is transferred to another existing partner, no approval from the company is required.

However, if the share is sold to a third party (outside the circle of shareholders), the effectiveness of the contract is subject to the approval of the general meeting of the limited liability company (the highest body of the company). Without the relevant approval of the general meeting, the contract will not take effect, and if the approval is not granted within 6 months of signing, the contract will be deemed never to have been concluded.

It is therefore essential to check the provisions of the articles of association, which may tighten or simplify the consent requirement or even prohibit the transfer of shares to third parties. A lawyer will help you interpret these internal regulations and ensure that the transfer procedure is legally flawless.

A well-prepared share transfer agreement must contain all essential elements. In addition to identifying the seller, the buyer and specifying the share being transferred (e.g. that it is a 100% share in ABC Ltd.), it is crucial to agree on the purchase price and the method of payment. In medium and larger transactions, it is not unusual for part of the purchase price to be held in escrow in case of any claims or to be paid in instalments. The agreement also includes representations and warranties by the seller regarding the state of the company – for example, that the financial statements accurately reflect the state of the company, that the company has no undisclosed debts, that it holds all necessary permits, etc. These representations protect the buyer and, if they prove to be untrue, allow the buyer to make claims against the seller (e.g. a price reduction or compensation). From the seller's point of view, it is therefore necessary to make only representations that are true and verifiable and to avoid disproportionate liability for matters beyond their control.

The contract also deals with the transfer and transfer of ownership of the share – usually the share is transferred to the buyer upon the effective date of the contract (which may be the date of signature or the date of fulfilment of certain conditions precedent). It may be agreed that the transfer will only become effective after payment of the full purchase price or after the fulfilment of other conditions (e.g. obtaining the consent of the Office for the Protection of Competition in the case of large mergers, etc.).

It also regulates how and when the management of the company will be transferred to the new owner, whether the original owner will assist with the transfer of know-how for a certain period of time, etc. In strategic transactions, you will often encounter non-competition clauses – the buyer usually requires that the seller not engage in business in the same field for an indefinite period (e.g. 3–5 years) after the sale so as not to compete with the newly acquired company.

These obligations must also be precisely defined in the contract (e.g. a competition clause limited in time and territory). All contractual terms and conditions should be clear and precise in order to minimise the risk of future disputes. An experienced lawyer will ensure that the wording of the contract is unambiguous and protects your interests, whether it concerns the definition of the purchase price, guarantees or penalties for breach of contract.

Notary services and completion of the transfer

To complete the transfer of a limited liability company, it is usually necessary to involve a notary and fulfil certain formalities with the state. Notary services play a role in two areas in particular: verifying documents/signatures and ensuring changes are made to the Commercial Register. As mentioned above, the signatures on the share transfer agreement must be officially certified – this can be done by a notary, CzechPOINT or a municipal authority. If the sale is approved by the general meeting, it may be necessary to draw up a notarial deed of the meeting (if required by law or the articles of association).

Furthermore, in the event of significant changes in the company's structure, it may be advisable (or mandatory) to have a notarial deed drawn up certifying the changes.

A major advantage of a notary in M&A transactions is that the notary can make direct entries of changes in the Commercial Register. This means that as soon as the contract is concluded and the conditions are met, the notary registers the new owner (partner) of the limited liability company directly in the public register of companies. The transfer is thus officially completed within a few minutes and the company details are up to date. There is no need to wait for lengthy court proceedings to change the registration.

The condition is usually that the notary has all the necessary documents regarding the transfer at their disposal. With regard to the transfer of the purchase price, it should be noted that escrow of the purchase price is a recommended tool for increasing the security of the transaction – the money from the buyer is deposited with an independent authority and paid to the seller only when it is certain that the share has been transferred to the buyer.

This protects both parties: the seller does not risk transferring the share without payment, and the buyer can be sure that they will only pay once they have acquired the company.

In practice, lawyers and notaries often work together: lawyers agree and draft the terms and conditions of the contracts, and the notary takes care of the official formalities (verification, minutes of the general meeting). It is important for the client that the entire process is coordinated, which is why a good law firm will also ensure communication with the notary so that the transfer of the company goes smoothly and quickly.

Tax consequences of selling a company

When selling a company, the tax implications of the transaction must not be overlooked. A successful sale of a company usually means that the seller (typically a natural person – the owner) receives a one-off income from the sale of the business share. In general, the profit from the sale of a business share is subject to income tax.

For individuals in the Czech Republic, this is a 15% tax on capital income (or 23% for very high incomes above a certain limit). The tax base is the amount that the seller receives as the purchase price, reduced by what the sale cost them – i.e. the acquisition value of the share (how much they invested in the company or how much they paid for the share) and the expenses associated with the sale (e.g. legal services, expert opinions).

Correctly determining the tax base can be quite complicated, especially if the share was acquired gradually or through non-monetary contributions, and it is advisable to consult a tax advisor.

However, Czech tax laws also contain exceptions and exemptions that can be very advantageous for the seller. The most significant is the so-called time test. This exemption motivates entrepreneurs to make long-term investments.

Please note that the period is calculated from the acquisition of the share – if, for example, the current owner inherited part of the company or purchased it gradually, the periods are calculated separately.

In the case of inheritance from close relatives, the time during which the deceased (the original owner, if an ancestor/descendant) owned the share is also included in the time test. It is therefore possible that if a son inherits a company from his father, who owned it for decades, he can sell it immediately without any tax burden.

In addition to income tax, it is also important to bear in mind other tax aspects of the transaction. For example, if a legal entity sells a share (a company sells a subsidiary), different tax regimes or possible exemptions apply. It is also necessary to check whether the sale of the company triggers a value added tax (VAT) liability – the sale of the share itself is exempt from VAT as a sale of securities, but if it is a sale of individual assets (asset deal), VAT may come into play.

Real estate acquisition tax is also not payable on the sale of a share, but if the company transfers real estate, the situation would be different. Therefore, for every sale of a larger company, it is advisable to consult a tax advisor who will propose the optimal structure from a tax perspective. Law firms often work with tax experts to ensure that clients do not pay more than they have to and that everything is done in accordance with the law.

Possible risks when selling and how to minimise them

Selling a company carries a number of risks that the seller should be prepared for in advance. We have already mentioned some of the risks, such as discovered deficiencies during due diligence that may reduce the price or deter buyers, or weaknesses in the company's systems that may complicate the handover. However, other risks may arise after the sale if the contractual documentation does not sufficiently protect the seller's interests. Here are the main areas of risk and tips on how to minimise them:

Mismatched expectations and unclear terms

If the seller and buyer do not clarify all the essential points of the transaction (what exactly is being sold, at what price, when and how payment will be made, what will happen in the event of a breach of contract, etc.), there is a risk of misunderstandings and disputes. This can be prevented by a detailed contract covering all the essentials and sufficient communication during the negotiations. Everything that has been agreed verbally should be confirmed in writing in contracts.

Legal defects and claims of the buyer after the sale: If, after the sale, it turns out that the company had any hidden liabilities, legal defects or unfulfilled obligations, the buyer may claim penalties or compensation from the seller (based on a breach of the representations and warranties in the contract). Example: after the sale, it emerges that the sold limited liability company owes taxes, which the seller ‘forgot’ to disclose – the buyer may then demand compensation for this damage.

Solution: Thorough preparation and openness during due diligence, risk coverage in the contract (e.g. by setting up an escrow for part of the price for a certain period of time until it is verified that no such obligations exist). A lawyer will help you set up the seller's representations and liabilities so that they are reasonable and time-limited, thus avoiding undue uncertainty.

Failure to comply with legal procedures

 Administrative errors can lead to invalidity of the transfer or other complications. For example, if the required approval of the general meeting or verification of signatures is forgotten, the transfer of the share will not become effective. Such a formal error can cause confusion as to who is actually the shareholder and, if necessary, protracted legal proceedings. It is therefore necessary to strictly comply with all legal procedures – from internal approvals to timely reporting of changes to the state. A professional lawyer and notarial supervision significantly reduce such risks.

Risk of payment failure

For larger amounts, there is a risk that the buyer will not pay on time or at all (e.g. if the transaction is financed by a loan and the loan is not granted). The seller should protect themselves by not transferring the company before they are certain of payment. This can be dealt with by mechanisms in the contract (suspensive condition of transfer until payment, bank guarantee, notarial/lawyer escrow of the purchase price, etc.).

The aforementioned escrow provides certainty – the money is held by an independent party and is only released once the conditions have been met.

Human factor and information leakage

The sale process should be confidential. Premature disclosure to employees, business partners or competitors can cause panic or reduce the value of the company. It is necessary to maintain confidentiality (NDAs with potential buyers, gradual disclosure of information) and also to manage internal communication – e.g. when and how to announce the sale to key managers so that they remain motivated and help with the transition. An experienced advisor can guide the owner through this psychological and organisational aspect of the transaction.

 

Overall, clear contractual terms, careful control and openness are the best risk prevention measures. Unexpected situations can arise in any transaction, but with good preparation and professional assistance, most unpleasant surprises can be avoided or effectively resolved.

Different sale scenarios: strategic investor vs. retirement

Every sale of a company is unique and differs in terms of the owner's motivation and specific needs. The dynamics of a sale to a strategic investor are different from those of a sale when the owner is planning to retire. Let's consider two simplified scenarios:

Sale to a strategic investor

The owner of a thriving medium-sized company decides to sell a majority stake to a foreign strategic investor operating in the same industry. The seller's goal is to raise capital for further growth and leverage the investor's global network, while retaining a minority stake and continuing to manage the company.

In this scenario, the emphasis is on establishing post-sale relationships – the contract will detail the role of the original owner after the investor's entry, their powers and involvement in management. The strategic partner will conduct extensive due diligence and usually require continuity guarantees – for example, that key managers will remain with the company and that the seller will not leave immediately (a period of cooperation or a gradual buy-out of the remaining stake in the future is often agreed).

Price negotiations may also take into account the investor's commitment to inject additional funds into the company (so-called earn-out mechanisms). Legal assistance in this case consists not only in the preparation of contracts, but also in the coordination of the entire merger process – it is often necessary to deal with, for example, obtaining the consent of the antitrust authority, setting up a new corporate structure or amending the employment contracts of key personnel. In this scenario, the business owner will appreciate having an experienced lawyer at their side who will look after their interests when a ‘big player’ enters the company and help them negotiate the best possible terms for future cooperation.

Selling a company upon retirement

The owner of a family business that has been operating for decades decides to sell the company and retire. He has no successor in the family, so he is looking for either a competitor to buy the company or managers to take it over. His priority is often not only the price, but also that the company remains in good hands and retains its good name.

In this case, the sale will probably take the form of a 100% transfer of shares, and the original owner will completely cease his active involvement after the transaction. Careful valuation of the company is key – the owner naturally wants to get as much as possible, but at the same time needs to set a realistic price in order to find a buyer. Legal and financial advisors help them prepare a business valuation and find suitable buyers. Before the sale, the owner often focuses on improving the company for sale (removing unnecessary assets, terminating risky activities, stabilising the team of employees). When negotiating the contract, it may be crucial for them to agree on a non-competition clause – they may want the freedom to pursue consulting in the field after retirement, which the buyer accepts on the condition that they do not establish a new competing company.

It may also be agreed to transfer know-how within a certain short period after the sale in the form of consultations. In this scenario, in addition to preparing all the documents, the law firm helps coordinate the transfer of the agenda to the new owners and ensures that the company does not ‘stumble’ from a legal point of view before the handover – i.e. that everything is settled (contracts, employees, licences). The owner can retire with peace of mind, knowing that the contracts have covered all possible risks and that they have handed over the company responsibly.

These examples show that the needs of sellers can vary – some want to completely exit the company, while others are looking for a partner and remain in a certain role. Professional legal assistance is therefore always personalised: a good lawyer or advisor will first understand your goals (e.g. maximising price vs. long-term stability of the business) and tailor the sales strategy and draft contracts accordingly.

In any scenario, however, professional preparation, precise contracts and risk management are the foundation for success.

Who can you contact?

Expert legal assistance throughout the process

As is clear from the steps described above, the sale of a limited liability company is a complex transaction involving legal, financial and commercial issues. Professional legal assistance (together with tax and, where applicable, investment advice) is therefore essential if the sale is to proceed smoothly and successfully. An experienced lawyer guides the client through the entire process – from the early stages of considering the sale to the final handover of the company to the new owner.

In the initial phase, a legal advisor will help you consider all options and prepare the company for sale. They will point out any legal obstacles that need to be resolved in advance (e.g. changes to the articles of association, amendments to contracts with suppliers, intellectual property protection, etc.) and advise on the optimal structure of the transaction.

They can also recommend reliable partners for business valuation or find suitable buyers through their network of contacts.

During negotiations with the buyer, the lawyer acts as your negotiator and guardian of your rights. They will prepare or review a non-disclosure agreement (NDA) and other preliminary documents (e.g. a letter of intent – a preliminary agreement on the basic outline of the transaction). During due diligence, they will coordinate the provision of information to maintain a balance between openness and the protection of sensitive data.

Once a draft purchase agreement is on the table, the lawyer will review it in detail, identify risk points and propose amendments in the client's favour. Many business owners have no idea what pitfalls may be hidden in complicated contract provisions – it is the lawyer's job to uncover and explain these pitfalls.

Poor or inadequate legal advice at this stage can have fatal consequences, such as a poorly drafted contract that unnecessarily exposes the seller to future claims by the buyer or even thwarts the entire transaction. On the contrary, high-quality legal services ensure that the contract provides maximum protection for the seller and that the liability for the company after the sale has clear boundaries.

In the final stage, lawyers take care of all the formalities – they communicate with the notary regarding the verification of signatures and entry in the commercial register, prepare proposals for changes to the register, and, if necessary, arrange for the funds to be held in escrow. This means that the client does not have to worry about administrative details or deal with the authorities – everything is taken care of as part of the service provided.

In addition, the lawyer often plays a psychological support role. Selling a company is an emotionally demanding process, and the owner may experience pressure or uncertainty during negotiations. An external advisor helps to manage these emotions – providing an unbiased perspective and relieving stress by handling complex situations professionally and with insight. The owner can thus rely on an expert who knows what is customary in similar transactions and what is ‘over the line’ and will not allow the other party to take advantage of their possible ignorance.

Conclusion: Take the first step towards a successful sale

The sale of a limited liability company can be the culmination of your business – a one-time opportunity to capitalise on years of work. To ensure that everything goes according to plan, do not underestimate the importance of preparation and surround yourself with experienced professionals. With the help of a specialised law firm and other advisors, you will protect your interests, minimise risks and increase the chances of a smooth transaction.

So don't hesitate to take the first step today – contact our law firm for a no-obligation consultation on the possibilities of selling your company. We will be happy to help you set up a sales strategy, prepare the necessary documents and guide you safely through the entire process from start to finish. With us by your side, you can hand over your business with the confidence that everything is taken care of legally and you can fully focus on the new chapter in your life.

If you are selling a company, do it right and with professional support – the results are worth it.