Company acquisition, but how? Share, asset or division purchase?

Forms of company acquisition

A.) Share purchase. By default, we can assume that the seller is planning to sell and the buyer intends to buy the entire company. In this case, the most obvious solution is the sale of the company’s shareholding (typically its quota or shares) in a share-deal as a result of which all assets of the company sold are transferred to the buyer. If the buyer does not intend to acquire the entire company, only a part of it, the typical solution would also be a share purchase in this case defining, at the same time, the conditions for setting up a joint venture. 

However, selling the entire company may not always be the seller’s preferred choice and legal and economic reasons may also justify transaction structures other than the base scenario of a share purchase. 

B.) Asset purchase. It is typically revealed at the beginning of the transaction if the target of the transaction is not to acquire the entire company but only certain assets or groups of assets. In such cases, the buyer is not buying a shareholding in the company and is ultimately not buying a running business but separate assets for its existing business activity or a business activity it intends to develop. 

C.)Division transfer. If the buyer only intends to takeover a certain part, an operating economic unit of a company, the subject of the transaction will be a division transfer. A division transfer almost always includes an asset deal but the transfer of a division typically has a much wider scope, covering an operating economic unit (a going concern),which generally has the following elements: 

• tangible assets, real estate, intangible assets (intellectual property), 
• accounts receivable and accounts payable or other contracts and relating receivables and liabilities, 
• licenses, 
• employees of the division. 

Each form of company acquisition comes with different conditions and consequences

The simple breakdown described above does not necessarily reflect that the right execution of the transaction requires an entirely different approach and transaction preparation in each case, which may result in different contracts and present different tasks for the parties and their advisors and the economic results and risks of the different transaction types may also be very different. 

We would like to present in a number of posts on this topic the business, legal, accounting and tax aspects the careful consideration of which is essential when determining the structure of the transaction. Let us first take a look at the business factors the consideration of which (on the side of both the seller and the buyer) is necessary for the selection of the right transaction type and contracting process. 

The business process of company acquisition

1.Definition of key contract terms

• In the case of most transactions, the parties typically already define a number of contract terms before starting the due diligence process. These contract terms are generally not necessarily binding but they serve as a means for the parties for defining the framework under which the negotiations are conducted in relation to the final contracts. The parties already have to consider important questions (subject and type of the transaction, necessary contracts, consideration or calculation of the consideration, timeframe, responsibilities etc.) in detail at this point. 
• As part of the term sheet, the parties must by all means define the proposed type of the transaction. This basically depends on whether the business intention can be realized by way of the acquisition of only assets or a division, whether the seller intends to keep an activity of the company that the buyer does not wish to takeover or how complex the business to be transferred is. 
• For the buyer, the type of transaction helps to determine the proper scope of the due diligence while for the seller this will determine the recipient of the purchase price:

1. In the case of a share deal, the consideration or purchase price will be received by the quota holder or shareholder, i.e. no revenue will be realized by the company sold. 
2. In the case of a division transfer or asset deal, the consideration is received by the company owning the division or asset sold, the owner may therefore also have to consider the conditions under which (the taxation subject to which) it receives the purchase price. 

2.Due diligence

• By default, the buyer will and should always carry out a due diligence in order to assess both hidden and obvious risks. 
• The due diligence typically covers a wider scope and may therefore demand a higher cost and more time in the case of a share deal as in this case the buyer is taking over an entire company with its history and the risks deriving from potential errors. Therefore, in this case a thorough review in terms of financial, accounting, tax and legal compliance by a qualified expert is a must. 
• In the case of the acquisition of a division or assets, buyers typically do not apply a comprehensive review and only carry out a limited-scope due diligence of the assets to be taken over and the contracts (particularly, employment contracts) as well as the commercial or technical/operative conditions of the division to be taken over. 

3.Contract conclusion

• The contract must, of course, properly reflect the business intensions of the parties. In this regard, it is important which party the transaction contract is drafted by. It is general practice but not a necessity that the first draft is provided by the buyer but no matter which side you are on, you should insist on preparing the first version of the contract or you may already define the party preparing the first draft of the contract in the term sheet. 
• It is fortunate if the fewest possible business questions come up during the contract conclusion process but general experience shows that the findings of the due diligence typically raise business questions also, which have to be resolved during the negotiations. The signing of the contract may take a few weeks to several months depending on the transaction and the questions to be clarified. Both parties should prepare for this at the very beginning of the transaction and deadlines should already be set in the term sheet. 

4.Post-deal integration

• The transaction is by no means finished for the buyer when the contract is signed, the purchase price is transferred and ownership is acquired. After the sale and purchase, another, large(r) task is coming perhaps presenting an even greater challenge than the entire sale and purchase transaction: the integration of the asset or division taken over or the acquired shareholding representing all or a part of the company in the buyer’s existing business. This does not always mean a merger in a corporate sense (e.g. if the buyer keeps the acquired company as a separate unit or if the buyer has no company of its own in which to integrate the acquired business) but the buyer has to devote considerable energy to integrating the acquired asset, division or company in its existing operations. 
• The integration is the most difficult if a shareholding representing an entire company has to be integrated fully into an existing company. It is equally difficult however if a division has to be integrated into an existing business. 
• The situation of the buyer is somewhat easier if it intends to integrate “only” an asset or a group of assets into its existing company. Challenges may however also arise in this case: headcount may have to be increased for the operation of the asset and the extra workforce may need training or internal processes may have to be transformed or extended when the new asset is taken over.

The success of the transaction depends as much on prior due diligence and the negotiation of favourable contract terms as on the handling of the processes necessary after the conclusion of the transaction. Incorrect preparation cannot be corrected by professional integration but a good deal may also be messed up easily if the buyer lays back after signing the contract and does not devote energy to the integration process. 

Our experience shows that the preparation and professional administration of the transaction process has a significant effect on the pricing of the transaction. Similarly to a construction, building is easy and cost efficient if planning was precise and all-pervasive.