Once the decision to sell has been made by the entrepreneur or the shareholders and adequate preparation of the company for a sale has taken place, the actual sales process can begin. A non-trivial question is what specifically is to be sold. Is the entire company for sale? Is it only the business operations or are even only parts of it? Are rights to be sold, such as property rights, licenses or contracts? Is commercial real estate to be sold as well? The answers to these questions suggest whether a share deal or an asset deal is suitable for the transaction.
What is a share deal?
A share deal is when you want to sell rights to company shares. The buyer then assumes all rights and obligations associated with the transferred shares. From the moment he takes over the shares, he is liable for everything connected with the company and must therefore thoroughly inform himself about your company before making the purchase. His Due Diligence will be comprehensive to avoid finding “a pig in a poke” after the purchase. To cover himself, the buyer will also require comprehensive guarantees from you. This is common practice.
But a share deal can also allow the buyer to benefit. For example, if he acquires a property in connection with a share deal, this may mean that he does not have to pay real estate transfer tax, which he would be obliged to pay if he acquired the property in an asset deal. The buyer would be acquiring company stock, not real estate. The fact that the company happens to hold a property on its balance sheet is irrelevant for tax purposes. At the same time, the buyer himself may acquire a maximum of 94.9% of the company shares. For control over 100%, he needs a silent partner who acquires at least 5.1% of the shares. Here, only structuring advice can be given, but no reliable tax advice.
What is an asset deal?
With an asset deal, the buyer acquires defined assets, a business segment, contracts or rights to businesses, etc. The asset deal is not a tax deal. Anything that is not explicitly listed, he does not buy and remains with you. For the buyer, this is a way to rule out buying “skeletons in the closet”. The examination in the course of a due diligence can be kept simpler than in a share deal.
Example: The buyer of a manufacturing company acquires the company shares in a share deal. After the purchase is completed, it turns out that a customer complaint received by the company before the time of the transaction now triggers justified claims for compensation from a customer. The buyer must then fulfill these claims – unless he had included appropriate guarantees from the seller in the purchase agreement that there would be no complaints. In this case, he could claim against the seller for disadvantages.
Advantages of a share deal
With a share deal, all assets and all rights and obligations are transferred to the buyer. With a share deal, buyers can be sure that they really take over all business-related contracts and assets.
In the case of a share deal, prospective buyers will, however, inform themselves in detail about inherited burdens, about contaminated soils, about contracts and about possible legal disputes and will demand appropriate guarantees from the seller. If you as the seller have a clear conscience, the share deal will be a clean cut for you. This is because by entering into the contract (signing), you are assigning all rights and obligations associated with ownership of the company shares to the buyer.
Disadvantages of a share deal
In a share deal, buyers take over the rights to the shares in a company. As a result, buyers assume full responsibility for the acquired company. If all risks associated with the purchased company have not been recorded in the course of due diligence and appropriate guarantees have not been agreed in the purchase agreement, the buyer is liable for all damages that may arise from these risks.
Advantages of an asset deal
Buyers may seek to enter into an asset deal with sellers when they want to “cherry-pick.” This means that the assets, contracts, employees, machinery, etc. that the buyer is not interested in remain with the seller. Sellers must find meaningful uses for these “residuals” that sellers cannot assign.
Another advantage of an asset deal may be that buyers can write off the acquired assets for tax purposes.
Disadvantages of an asset deal
Although due diligence is easier in an asset deal, the implementation of an asset deal can be more complicated than that of a share deal. While in a share deal the buyer assumes all rights and obligations of the seller, in an asset deal all contracting parties must agree if certain contracts are to be transferred. While a share deal can be agreed to in one contract, an asset deal may require the review and re-execution of many individual contracts.
Procedure and next steps
It is recommended to involve a tax advisor experienced in M&A at an early stage. In any case, the share deal model seems to meet with favor, especially among real estate groups.
If you, as the seller, have worked out your preference for a share deal or an asset deal together with your tax advisor, you should have a company valuation carried out in order to define a realistic price corridor.