Company purchase as part of mergers and acquisitions (M&A)
The purchase of a company is a transaction based on a special purchase agreement in which a company or an interest in a company is transferred in whole or in part. Put simply, it is the (partial) acquisition of a company, often referred to as an acquisition or takeover. It is important to draw the line between friendly and hostile takeovers. The latter does not take place in agreement on the basis of contract negotiations, but without the consent of the company concerned by means of an unsolicited purchase of the capital majority in the form of company shares.
A company purchase falls into an area of processes that are known in business as mergers & ; Acquisitions or M&A for short. Merger refers to the amalgamation or merger of two companies, while acquisition represents the purchase of parts of a company or an entire company in the sense of a takeover. M&A thus includes all processes that involve the transfer and change of ownership rights in companies.
A merger combines two companies into one in a legal and economic sense. They then continue to exist as a new organizational unit. A takeover is a little different. Here there is a transfer of property rights from one party to another with the corresponding rights and obligations. The purchased company can remain under different management as a separate organizational unit or be integrated into the purchasing company.
M&A transactions take place within the framework of strategic company development, with reorganization, growth or economic strengthening being possible Present motives.
Various legal regulations are relevant for M&A transactions. Depending on the situation, capital market law, the Foreign Trade Act, tax law, antitrust law, labor law and the Securities Acquisition and Takeover Act must be observed.
The confusing legal basis, as well as the economic and organizational complexity of M& ;A operations require expertise and tact to implement appropriate plans. It is not uncommon for companies to resort to external M&A consulting.
Buying a company: process and organization
The purchase of a company is an individual process for which there is no generally applicable process plan. However, most company acquisitions follow a certain pattern, which consists of a preparation and analysis stage, the contract negotiations and the final settlement.
In the preparation and initiation phase, both buyer and seller explore their goals and establish a strategy. If the seller is ready to sell, a very important process begins, especially for the buyer: the company audit, also called due diligence.
The prospective buyer, or his advisors, take the target company under the microscope to determine values and possible risks. This process is very extensive and requires expert knowledge. That is why specialized consultants from the field of mergers & acquisitions often play a key role here. The due diligence process naturally turns out to be very complex, especially in large companies. However, a comprehensive due diligence phase with expert support is also recommended for medium-sized companies. Contract negotiations can already take place during the due diligence phase, with the parties involved agreeing on the type of transaction and the precise terms of the contract (specific subject matter of the contract, purchase price, transfer date, legal relationships, guarantees and warranties, if applicable….).
Once the due diligence phase has been completed and there is agreement on the contents of the contract, the final signing takes place. In some cases, company purchase agreements must also be approved by other parties (such as the antitrust authority or supervisory board).
The so-called closing phase follows, in which the purchase agreement is executed. Once this has been done, the buyer can make adjustments to the company in order to implement its predefined purchase targets.
Legal protection when buying a company
Not only the negotiations, but also the contract documents can be quite extensive when buying a company. In addition to the main contract for the final transaction, various preliminary and ancillary agreements can play an important role:
- In the course of the negotiations, the final contract is often preceded by a letter of intent in which the buyer declares his intention to buy. This is usually formulated in such a way that it is not legally binding, but it is nevertheless considered an important tool to confirm the seriousness of the negotiations.
- A letter of intent must be legally distinguished from a preliminary contract. The latter goes one step further and obliges the conclusion of a later main contract. Agreements made here are enforceable. A preliminary contract can make sense, for example, if there is already agreement on the content of the contract, but a main contract cannot yet be concluded due to certain obstacles (e.g. missing permits).
- A non-disclosure agreement can make sense for both sides, in which secrecy and non-exploitation of confidential information obtained in the negotiation process is agreed. Such an agreement is particularly important if no contract is concluded in the end.
- Sometimes the agreement of a non-competition clause can also be in the interest of the buyer. It can be stated that the buyer is not allowed to establish a direct competitor and is even not allowed to use his previous customer base or trade secrets. A time and space limit is usually set for this. Whether a special agreement is required for this is not clearly defined in legal terms, but the additional security cannot do any harm in individual cases.
Important before buying a company: due diligence
A due diligence is generally understood as a careful examination to safeguard against risks. In the economic life it concerns thereby as a rule a business partner examination as conditions for a co-operation, and/or for a transaction.
As already mentioned, it is in the normal case also part of an Akquisuitionsprozess. Here, due diligence refers to a detailed analysis of the economic, financial, legal and tax situation of the target company. This serves both to determine the purchase price and to hedge against risks.
Due diligence can vary in scope depending on the situation and can also focus only on certain sub-areas. In this context, a decision is made between Simplified Due Diligence and Enhanced Due Diligence. The former is carried out when the risk assessment is low and tends to be superficial. The latter, on the other hand, is applied in the case of a high risk and means a correspondingly more intensive examination.
The performance of due diligence can be a complex task and belongs in the hands of experts with appropriate industry-specific, legal and economic knowledge. These can be the buyer company’s own experts and/or external consultants, such as digatus.
The review mainly involves consulting documents and data from the target company, but also holding discussions with its management. In the examination, sub-areas can be weighted differently. As a rule, the financial situation (financial due diligence) and the market situation (commercial due diligence) of the target company are of particular importance in the purchase process. Furthermore, the examination of legal (legal due diligence) and tax (tax due diligence) factors is very relevant for the drafting of the purchase agreement. Softer factors, such as corporate culture or sustainability efforts, are also increasingly being included in the review. Such factors can also be risky for buyers, for example by affecting reputation. Sometimes factors of this kind are also subjected to more comprehensive due diligence only after the contract has been signed, in the course of corporate restructuring and adaptation.
Processing a company purchase: the possibilitiesEssentially, a distinction is made between two different forms of company acquisition, namely the asset deal and the share deal:
- In an asset deal, the assets of a company (real estate, plants , goods, …) sold individually to the buyer. It is possible to buy all of a company’s assets or only certain parts of them. What is privately owned by shareholders of the company but is used for operational purposes cannot be transferred. With the transfer of the assets, a transfer of business can also take place. At the same time, the buyer takes over existing employment relationships. At the end of a full asset deal, the buyer owns all of the company’s assets, while on the other side there is only the company as an “empty shell”.
- In a share deal, the assets are not sold, but the buyer acquires ownership shares in the company and thus completes the full or partial takeover. It can be, for example, shares, GmbH shares or shares in a partnership. The buyer thus becomes a shareholder and has corresponding rights and obligations, which also includes the employment relationships in this case. However, ownership rights to the entire company are transferred here and not its specific components.
Asset deal or share deal – which is more advantageous?
Naturally, the question arises for buyers and sellers as to which form of transaction is more advantageous when buying a company. Of course, this cannot be answered in a blanket manner, because both variants can have advantages and disadvantages, which is why many factors must be included.
For sellers, the share deal is often the preferred variant. With regard to the profit from the sale of the company, the share deal is usually more advantageous from a tax point of view. In addition, the processing and the drafting of the contract are usually less complex. In the case of an asset deal, each asset concerned must be listed in the purchase agreement in such a way that it can be clearly determined. In addition, a sales value must be determined for each asset. This can be particularly difficult in the case of intangible assets such as patents or brand names. This problem also affects the comparatively fast-moving IT sector in particular.
The complexity of asset deals can also be an argument in favor of a share deal for buyers. However, the asset deal can still be the better choice under certain circumstances. Particularly in the case of economically unstable companies, a share deal can be risky for buyers.In contrast to the asset deal, the buyer becomes a shareholder and thus also assumes liability for the company’s liabilities (e.g. for tax debts).
In addition, with the asset deal there is the option of individually selecting and evaluating purchase items. In principle, the buyer also has the option of excluding items that are of no value to him from the deal.
Which purchase transaction is ultimately more advantageous always requires a precise individual examination and can be determined within a professional consultation situation as part of due diligence -test, such as with digatus.
Minimize risks through M&A consulting
A company purchase is a complex process that can also contain a lot of stumbling blocks and become a failure. In particular, if there is a lack of professional support, the error rate is high, as experience shows. Often, it is very subtle differences that ultimately determine success and failure and require a trained assessment and approach.
Economic, legal, financial and even emotional pitfalls complicate the path to business acquisition. Professional M&A consulting can help to avoid them. On the one hand, this is due to special know-how. Even for experienced entrepreneurs, buying a company is usually not part of their daily business. For start-ups, it can even be completely new territory. The risk of making careless mistakes and perhaps being taken advantage of is correspondingly high. In addition, there is an emotional component that should not be underestimated. Buyers and sellers do not always pursue the same interests and goals. External advice then provides a neutral, unbiased perspective on the purchase process in the interest of the client. The objective assessment strengthens the client’s negotiating position. A good consulting firm also has the expert knowledge and experience to simplify and optimize the transaction.
An M&A consulting firm can be involved in all process components when buying a company. This already begins with the sounding out of the own company goals and extends to the company adjustment after the purchase completion. Particularly in the legal structuring of the purchase, in the price calculation and in the evaluation of possible risks, a professionally qualified M&A consultancy, such as that of digatus, usually pays off very well.
Company acquisition: IT is a special case
The comparatively fast-moving IT sector has a special position when it comes to company acquisitions. This is mainly due to the fact that determining a realistic purchase price is often difficult and the price expectations of buyer and seller can vary greatly.
Values in the IT sector are often of an immaterial nature and are therefore difficult to determine. p>
And especially with small and medium-sized software houses, the company’s success – and thus to a certain extent also the company’s value – often depends heavily on the owner. But what is interesting for the buyer is the value that still exists if this factor changes as a result of the purchase. Company organization, business model, specialists and customer base can be more important here than previous balance sheets. This must be taken into account when determining the value.
Here, choosing the right consulting company can be decisive. Non-industry consultants often tend to look at IT companies like other companies and use the same valuation methods. But this is a very specific market for which business knowledge alone is not enough. As a rule, industry-related market knowledge is required here.