Over the last twenty-four months, financial sponsors have continued to play a central role in the German M&A market. Based on publicly available deal data and market observations, private equity and venture capital investors accounted for approximately 35–40 per cent of all M&A transactions in Germany during 2023 and 2024. This figure increases materially in the mid-cap segment, where in many cases, sponsor involvement has become the default assumption when a professionally run sale process is initiated.

By value, sponsor-backed transactions have been even more significant. According to figures published by the German Private Equity and Venture Capital Association (BVK), private-equity-backed deals represented close to 40 per cent of total transaction value in 2024. This sustained level of activity is particularly noteworthy given the challenging macroeconomic environment, including higher interest rates, inflationary pressures and geopolitical uncertainty.

Financial sponsor sellers in Germany are typically sophisticated, transaction-experienced and strongly process-driven. They usually run structured auction processes, supported by comprehensive vendor due diligence reports, well-managed data rooms and clear timelines. Emotional attachment to the target business is rare; the overriding objective is a clean, timely exit with maximum certainty and minimal residual liability.

This approach translates into seller-friendly transaction terms. Warranty catalogues in sponsor exits are often more limited in scope, with a strong focus on title, authority and other fundamental warranties. Operational warranties are often substantially qualified. Liability caps are strictly limited, frequently to a nominal amount, and sellers will typically insist on a near-complete risk transfer to W&I insurers. Locked box pricing mechanisms are preferred, allowing the sponsor to achieve price certainty and avoid post-closing adjustments.

By contrast, trade sellers – particularly founders or family-owned businesses – are often more flexible in negotiations and may be willing to provide broader warranties and meaningful post-closing recourse. Earn-out structures are far more common in such transactions, especially where valuation expectations diverge or where the seller’s continued involvement is seen as critical to future performance. Vendor due diligence is less common and regularly more limited in trade sales, and buyers will usually rely far more heavily on their own due diligence.

From the perspective of W&I insurers, sponsor-backed transactions have the advantage of being more predictable due to the professional preparation, clear disclosure and disciplined approach to warranties, in addition to the target usually having been subject of a professional due diligence during the original acquisition. However, trade sellers often have better operational insight. In any case, the aggressive limitation of seller liability also means that insurers are increasingly the primary risk bearer.

The process for effecting a share transfer in Germany depends on the legal form of the target company.

In case of a German limited liability company (GmbH), the transfer of shares requires notarization. The share purchase agreement must be executed before a German notary, who certifies both the agreement and the transfer of title. Following closing, the updated shareholder list must be filed with the commercial register, and the transfer only becomes fully effective vis-à-vis the target company when the revised list is enclosed with the commercial register. This highly formalized notarial requirement has practical implications for deal timing and execution, especially in cross-border transactions.

For German stock corporations (AG), the process is generally more straightforward. If physical share certificates have been issued, the transfer is effected by endorsement and delivery. In the case of dematerialized shares, entry in the target company’s share register is usually sufficient. Notarisation is not required for share transfers in German stock corporations.

Germany does not impose a general stamp duty or transfer tax on share transfers. However, an important exception applies where the target company owns German real estate. If certain thresholds are met – typically involving the direct or indirect acquisition, or transfer within a defined period, of at least 90 per cent of the shares – real estate transfer tax (RETT) may be triggered at rates ranging from 3.5 to 6.5 per cent, depending on the relevant federal state. This issue is a key focus in deal structuring and due diligence.

In German PE transactions, it is standard practice for the acquisition to be effected through a special purpose vehicle (SPV) with no operating history or assets other than its nominal capital. To provide sellers with sufficient comfort as to closing certainty, financial sponsors typically deliver equity and debt commitment letters. These commitments are usually subject to limited conditionality and are designed to only mirror the conditions precedent in the share purchase agreement.

Sellers rarely receive direct guarantees from the sponsor fund or its ultimate investors. Instead, reliance is placed on the enforceability of the commitment letters and the sponsor’s reputation. In some cases, particularly in competitive auctions or where regulatory approvals create execution risk, reverse break fees may be agreed as a means of compensating the seller if the transaction fails due to buyer-side issues.

Locked box pricing mechanisms have become the default approach in German M&A transactions, particularly in competitive auctions with a PE seller. Locked box mechanisms are most commonly seen where the target has stable and predictable cash flows and working capital requirements. They are less frequently used in distressed situations, highly volatile businesses or transactions with a long signing-to-closing period, where completion accounts may still be preferred to reflect interim developments.

Risk allocation in German PE transactions is highly standardized and closely aligned with international market practice.
The cornerstone of risk allocation is the use of warranty and indemnity insurance, which has become the norm in sponsor-backed deals. W&I insurance allows sellers to exit with minimal residual liability while providing buyers with meaningful protection for breaches of warranties.

Where warranties are insured, seller liability is often capped at a nominal amount, usually EUR 1. For uninsured warranties or specific indemnities, liability caps typically range between 10 and 20 per cent of the purchase price. Time limits for warranty claims are generally 12 to 24 months for general warranties, with longer periods for title and other fundamental warranties.

De minimis thresholds and baskets are standard features, excluding minor claims and ensuring that only economically material issues give rise to liability. Specific indemnities are used to address identified risks, such as tax exposures, environmental matters or ongoing litigation, and are often excluded from W&I coverage or subject to bespoke underwriting.

Material adverse change clauses remain relatively rare in German transactions, but they have gained some traction in volatile market phases. Overall, the German market is characterized by a strong preference for deal certainty and the efficient allocation of risk, with W&I insurance playing a central and sophisticated role.

While locked box mechanisms have become the norm, closing accounts or similar adjustment mechanisms are still often used in more volatile situations in order to reflect interim developments.

Escrow accounts for closing accounts-based purchase price adjustments or for indemnities in addition to an existing W&I cover are not common in the German market.

Warranty and indemnity (W&I) insurance has become a cornerstone of M&A transactions in Germany and is firmly embedded in market practice. W&I insurance is used in well over 90 per cent of private-equity deals with an enterprise value above EUR 50 million. In competitive auction processes, a bidder proposing meaningful seller liability without W&I insurance would be at a substantial competitive disadvantage.

The use of W&I has also expanded significantly into the mid-cap segment and is increasingly seen even in smaller transactions. This development is driven by several factors: the growing standardization of underwriting processes, increased competition among insurers, and a general market preference for clean exits and efficient risk allocation. As a result, premium levels have become very predictable, and policy structures are closely aligned with typical German SPA concepts.

The German W&I market itself is highly competitive and international with a wide range of global and domestic underwriters competing not only on pricing but also on coverage scope, underwriting timelines and claims handling expertise. From the perspective of counsel advising both sponsors and insurers, W&I insurance has significantly influenced transaction dynamics. Sellers routinely cap their liability at nominal amounts, while buyers increasingly view the insurance policy as their primary recourse. This has led to greater emphasis on robust due diligence, disciplined disclosure and carefully drafted exclusions as well as far more detailed negotiations of the W&I policy.

Financial sponsors have shown selective interest in acquiring publicly listed companies in Germany, but public-to-private transactions remain relatively uncommon when compared with private M&A activity. There has been a modest increase in such transactions in 2023 and 2024, including several high-profile take-privates (e.g., KKR’s acquisition of OHB or EQT’s bid for SUSE), that attracted significant market attention.

That said, from a German legal perspective, public-to-private transactions are complex, time-consuming and resource-intensive. They are subject to a comprehensive regulatory framework, including mandatory offer requirements, minimum pricing rules, disclosure obligations and time-consuming squeeze-out procedures. Regulatory oversight by the German regulator BaFin plays a central role for public M&A transactions, and compliance with formal requirements can significantly affect deal timing and execution risk. These factors explain why many financial sponsors continue to focus primarily on private targets, carve-outs or sponsor-to-sponsor transactions.

In addition, public-to-private deals raise specific challenges in relation to governance, employee participation and post-closing restructuring. From an insurance perspective, W&I coverage is typically more limited in public transactions, given the reliance on publicly available information and the narrower scope of warranties. As a result, public-to-private transactions are not a dominant feature of the German PE landscape.

Foreign investment control has become an increasingly important consideration in German PE transactions. The German foreign direct investment (FDI) screening regime primarily affects non-EU and non-EFTA investors in sensitive sectors. These sectors include critical infrastructure, defense-related activities, certain areas of technology, healthcare and media, among others.

It is important to note that the German FDI regime does not distinguish between financial sponsors and strategic investors. The decisive criteria are the origin of the investor and the nature of the target’s activities. In practice, FDI filings have become a routine part of transaction planning in relevant sectors. While many filings are ultimately cleared without conditions, the process can have a significant impact on transaction timelines and closing certainty.

For financial sponsors, early identification of potential FDI issues and proactive engagement with the authorities are therefore essential. Transaction documentation typically treats FDI clearance as a condition precedent to closing, and the associated risk is generally allocated to the buyer.

In German mid-market or large cap transactions, merger control clearance is almost invariably addressed as a condition precedent to closing. Where a financial sponsor is the acquirer, the buyer typically bears the primary responsibility and risk associated with obtaining antitrust approval. This allocation reflects established market practice and recognizes that sponsors are best positioned to manage regulatory strategy across their portfolios.

True “hell or high water” clauses, under which the buyer commits to take any and all steps necessary to secure clearance regardless of cost or burden, remain relatively rare in Germany. They may be seen in highly competitive auction processes or where regulatory risk is limited, but they are not the norm. Instead, SPAs usually include detailed cooperation obligations, requiring the seller to provide information and assistance during the merger control process.

In situations where regulatory risk is material or timelines are uncertain, reverse break fees may be negotiated. These fees are designed to compensate the seller if the transaction fails due to the buyer’s inability to obtain clearance. From a German legal perspective, such arrangements must be carefully structured to ensure enforceability and proportionality.

There has been a marked increase in minority investments by financial sponsors in the German market, particularly in growth companies, technology-driven businesses and family-owned enterprises. These investments are most commonly structured as equity participations combined with extensive minority protection rights. Typical protections include veto rights over key strategic decisions, information and reporting rights, and contractual exit mechanisms. Careful structuring is required to balance minority protections with corporate law constraints and to avoid unintended control implications.

Debt-like instruments with equity participation features, such as convertible loans or growth debt with equity kickers, are less common but are used in specific situations where valuation uncertainty or risk profiles make pure equity investment less attractive. These structures raise particular issues under German tax, insolvency and financial assistance rules and therefore require careful legal analysis.

Continuation fund transactions have also become a prominent feature of the German private-equity market. Driven by sponsors seeking liquidity for existing investors while retaining exposure to high-performing assets, such transactions involve the transfer of portfolio companies to new funds managed by the same sponsor. From both a legal and insurance perspective, continuation transactions are complex, raising issues of conflicts of interest, valuation, disclosure and governance. W&I insurance has played an important role in facilitating these deals by providing comfort to incoming investors. However, there are indications that the continuation activity may be moderating as exit markets reopen.

In German PE transactions, management incentive schemes are a central element of value creation and alignment of interests between financial sponsors and the management team. These schemes are typically structured as “sweet equity” or virtual management participation programs.

In “sweet equity” schemes, selected members of management are offered the opportunity to invest directly in the portfolio company, usually alongside the sponsor but on more favorable terms. The structure is often designed to allow for disproportionate participation of the management in the equity upside through preferred return structures, hurdle mechanisms or ratchets. In practice, sweet equity is often implemented through a separate class of shares or through shareholder agreements that define exit waterfalls. From a German law standpoint, it is required to ensure that these arrangements are compatible with capital maintenance rules and do not inadvertently trigger employment-law recharacterization (which would have significant tax and legal consequences).

Where direct equity participation is impractical or undesirable – often due to tax, governance or administrative concerns – virtual share or phantom stock programs are frequently used. These grant management a contractual right to a cash payment linked to the value increase of the company or the sponsor’s exit proceeds. Such arrangements avoid changes to the shareholder structure and are easier to administer, but they lack the psychological ownership effect of real equity and are regularly treated as compensation from a tax perspective.

Stock options are less common in traditional PE-backed companies but may be encountered in technology-driven or growth-oriented businesses, particularly where management teams are familiar with option-based incentive models.

Tax considerations play a decisive role in the structuring of management incentive schemes in Germany and often determine whether equity-based or virtual structures are chosen. From a German tax perspective, the key distinction lies in whether management acquires equity (at fair market value) or receives an economic benefit that is treated as employment income.

Where management acquires shares at fair market value, gains realized upon exit are generally subject to capital gains taxation. For private individuals, this typically means a flat tax rate of 25 per cent plus solidarity surcharge and, where applicable, church tax. This treatment is generally regarded as tax-efficient and is therefore a primary objective in structuring transactions. However, the valuation of management shares is closely scrutinized by tax authorities, and any discount relative to fair market value may be recharacterized as taxable employment income or be subject to gift tax.

If shares are acquired below fair market value and the discount is considered remuneration for services, the difference may be taxed as employment income at progressive rates up to approximately 46 per cent. This risk is a central concern in German management equity structures and often leads to extensive valuation work and careful documentation of the commercial rationale for differentiated pricing.

Since 2021, the German Income Tax Act provides for deferred taxation of employee share ownership in certain start-up scenarios. While potentially attractive in theory, this regime is rarely used in PE-backed transactions due to its restrictive eligibility criteria and limited practical applicability.

Phantom stock and cash bonus arrangements are treated as employment income and taxed at the time of payment, which makes them administratively simpler but generally less tax-efficient for management.

Non-compete obligations are a standard feature of senior management employment arrangements and are regarded as an important tool for protecting the value of the investment. German law draws a clear distinction between non-compete obligations during employment and post-contractual non-competes.

During the term of employment, non-compete obligations are generally enforceable without compensation. Post-contractual non-compete clauses, however, are subject to strict statutory requirements. To be enforceable, they must be agreed in writing, limited to a maximum duration of usually two years and be compensated for in an amount of at least 50 per cent of the manager’s last contractual remuneration.

In practice, post-contractual non-competes in PE-backed companies typically range from six to twenty-four months, with twelve months being the most common duration. The scope of the non-compete obligation must be carefully tailored in terms of geography and business activities, as overly broad restrictions risk being invalid.

Financial sponsors in Germany ensure control over material business decisions through a combination of contractual arrangements and corporate governance mechanisms. The central instrument is the shareholders’ agreement, which sets out detailed reserved matters requiring sponsor consent or qualified majority approval. These typically include acquisitions and disposals of shares, businesses or real estate, financing arrangements, approval of the annual budget and business plan, changes to senior management and amendments to constitutional documents. In addition, the articles of association are often amended to reflect key governance principles and to embed veto rights or special quorum requirements at corporate law level.
Management rules of procedure serve as a further layer of governance, providing detailed operational guidance and specifying approval requirements in more detail.

Board representation is another key control mechanism. Depending on the legal form of the company, sponsors appoint representatives to supervisory boards, advisory boards or similar bodies. Extensive information and reporting rights ensure transparency and enable sponsors to monitor performance closely. Even in minority investment scenarios, sponsors often secure veto rights over fundamental decisions, allowing them to exercise effective negative control without holding a majority of voting rights.

The use of management pooling vehicles is common in Germany if a larger number of employees or managers participate in the equity of a portfolio company. Pooling structures are typically implemented through a limited partnership (GmbH & Co. KG) or a similar vehicle that holds the shares in the portfolio company on behalf of the participating individuals.

The primary purpose of such vehicles is to simplify the cap table and streamline decision-making. Managers hold interests in the pooling vehicle rather than directly in the operating company, allowing voting rights and other shareholder powers to be exercised collectively. In many cases, the financial sponsor retains influence over the appointment of the pooling vehicle’s representatives, ensuring alignment with the overall governance framework.

From a practical perspective, pooling vehicles significantly reduce administrative complexity and facilitate exits, refinancings and restructurings. They help ensure that management acts as a bloc in shareholder votes.

Debt financing structures in German PE transactions vary significantly depending on deal size, sponsor profile and the risk characteristics of the target business. The German market has become increasingly differentiated, while at the same time showing a clear trend towards greater involvement of non-bank lenders across all segments.

In small-cap financings, traditional bank loans provided by a company’s accustomed bank (“Hausbank”) continue to play an important role. These facilities typically feature amortizing repayment profiles, conservative leverage levels and relatively tight covenants. For established small and medium-sized enterprises, promissory note loans (“Schuldscheindarlehen”) are sometimes used, particularly where the borrower has an established credit history and stable cash flows. Over the past few years, however, unitranche facilities have gained significant traction even in smaller buyouts. These structures combine senior and subordinated debt into a single tranche, often provided by a private debt fund, and are valued for their speed of execution and structural simplicity.

In the mid-cap segment, unitranche financing has become a dominant feature of the German market. It is widely used in sponsor-backed transactions, offering a single set of documentation, fewer lender groups and greater flexibility on covenants and repayment terms. Traditional senior/mezzanine structures remain relevant, particularly where pricing or relationship banking considerations favor a bank-led solution. Revolving credit facilities are typically added to provide working capital flexibility.

Large-cap financings are still characterized by more complex and layered structures. Syndicated senior loan facilities with multiple tranches (such as Term Loan A, B or C) remain common, often arranged by international banks. For larger or cross-border transactions, high-yield bonds may be used to achieve greater structural flexibility. Second-lien or mezzanine instruments are layered beneath senior debt to increase leverage, while revolving credit facilities provide liquidity.

Across all segments, the most notable trend is the growing role of unitranche and direct lending structures, reflecting tighter bank regulation and sponsors’ preference for execution certainty.

Financial assistance restrictions apply to German stock corporations (Aktiengesellschaft, AG), partnerships limited by shares (Kommanditgesellschaft auf Aktien, KGaA) and European stock corporations (Societas Europaea, SE) and in each case their subsidiaries, which must not grant financial assistance for the purpose of acquiring their own shares. Financial assistance for this purpose includes guarantees and asset security provided as credit support. The prohibition does not apply where the relevant entity is party to a domination or profit and loss transfer agreement.

A limited liability company (Gesellschaft mit beschränkter Haftung, GmbH) may grant security for the purpose of acquiring its own shares subject to complying with applicable capital maintenance restrictions (section 30 et seq. GmbHG).

For mid-cap and large-cap deals, the German market typically uses the Loan Market Association (LMA) standard forms as a starting point. These templates are widely adopted for syndicated loans and have also heavily influenced unitranche documentation. German law-governed adaptations are common, particularly to reflect local insolvency law, financial assistance constraints and security concepts.

For smaller financings, an “LMA light” agreement is frequently used. Small-cap deals will also frequently be documented using the bank’s own templates (particularly if it is a savings bank).

While standard forms provide a useful baseline, key commercial and legal provisions – such as financial covenants, events of default, financial definitions and transferability – are almost always heavily negotiated. The degree of customization increases with deal size and complexity. In large-cap financings, documentation is often highly bespoke, reflecting competitive lender dynamics and cross-border considerations. In small-cap deals, documentation may adhere more closely to the template, particularly where time pressure is high and lender leverage is strong.

Private debt funds may use proprietary templates, but even these are typically aligned with LMA standards in substance.

Over the past two years, negotiations in German PE financings have been shaped by higher interest rates, increased economic uncertainty and more cautious credit risk assessments. One of the most contested areas has been covenant flexibility. Borrowers and sponsors have sought looser or no financial covenants, while lenders have pushed for tighter controls.

EBITDA definitions have been another major focus. Disputes frequently arise over add-backs and pro forma adjustments, particularly in buy-and-build strategies. Permitted debt and restricted payment baskets are also closely negotiated, as sponsors seek flexibility for acquisitions, refinancings and distributions. Equity cure rights – allowing sponsors to inject equity to remedy covenant breaches – have gained importance, with negotiations focusing on frequency, amount and application mechanics.

Transferability provisions have attracted increased attention, particularly lenders’ rights to transfer loans to third parties, including credit funds. In addition, sanctions related undertakings have become more prominent, reflecting regulatory developments and investor expectations. Finally, pricing and fees have been subject to upward pressure, with margins and fees reflecting tighter credit conditions.

There has been a notable increase in the use of PE credit funds as sources of debt capital in Germany. Direct lending by private debt funds has become a core feature of the market, particularly in unitranche and mezzanine financings. These lenders often outperform traditional banks in terms of speed, certainty of execution and willingness to tailor structures to sponsor needs.

In mid- and large-cap transactions, private credit funds now account for a significant share of new financings, either as sole lenders or as part of club deals. This shift is driven by regulatory constraints on banks, increased capital requirements and sponsors’ preference for flexible, relationship-driven financing solutions. Private credit funds are particularly active in sectors such as technology, healthcare and business services, where asset-light models and predictable cash flows are well suited to direct lending.