Motives for a company acquisition
Both companies and managers may be motivated to acquire a company or business operation in order to continue running the entity on their own.
The purchase motives of seeking companies may well differ from the purchase motives of seeking managers.
Procedure of a company purchase
Managers who acquire business shares in another company carry out a management buyin. If managers are already active in the company in which they wish to acquire business shares, they carry out a management buyout.
Companies that acquire business shares in other companies (acquisition) can do so in the form of a majority takeover, by which they take control of the acquired company; they can also acquire a minority stake in a company. In addition, a reciprocal shareholding in business shares is possible, resulting in a merger.
In either case, one challenge is to identify the shareholders of the target company and approach them in an appropriate manner. Once you have identified the shareholders and have their contact information, you need to consider how to gain their confidence that you are serious about investing in the company. You could be perceived as a competitor’s spy. Besides, you don’t even know if the shareholders can imagine a sale at all.
Once you have overcome this first hurdle, the next phase is to get an impression of the company. In this phase, the challenge is to obtain reliable information about the company that will allow you to make a business valuation. A confidentiality agreement is probably a prerequisite to obtain internal company information.
Finally, you should value the company and assess residual risks of a purchase. At this stage at the latest, you should consider together with your tax advisor whether you would like to acquire the rights to the business shares in the target company (share deal) or prefer to buy the business operations out of the company (asset deal). This decision is risk and tax relevant.
In either case, you should agree guarantees in the transaction agreement. If the circumstances differ from the contractually agreed conditions, you should provide for appropriate compensation payments.
The signing of the contract (signing) and the assumption of operational responsibility for the company (closing) conclude the corporate transaction. A certain transition period during which the former shareholder ensures a solid handover of the business can be very useful.
How to identify suitable companies
Consider whether you want to acquire a business on market terms that is well managed and generates sustainable profits, or whether you want to acquire a company from an economic crisis at a low price and turn it around yourself (distressed).
Also consider what contribution the company should actually make so that you are better off after the acquisition than you are now (synergies, operational leverage of your expertise, etc). Derive the ideal industry, value creation and market from this.
Narrow the range of company size wisely so that you get the intended value: A larger company has some structure, but also requires different, indirect management than a smaller company. Depending on your financing needs, you may hold only a homeopathic business share in a larger company and become correspondingly dependent on majority shareholders. You may find yourself no better off as a result of the shareholding step than you would have been as an executive.
Advice for your company purchase: What you need to consider beforehand
Before you invest in a company, you should be sure that you want to be an entrepreneur with all the consequences. Also clarify this decision in your personal environment. If necessary, supplement your own skills and resources with partners that you involve in the management of the company.
Define your then available budget for the purchase of the company and the transaction costs. Plan for sufficient reserves.
If necessary, involve capital providers in your project. With co-financing commercial banks, you retain full decision-making freedom in the management of the company, but the entire business risk also remains in your hands. If you involve other investors in the company, you must coordinate the management of the company with these investors, but you also share the entrepreneurial risk.
In any case, a realistic and detailed business plan is recommended. You can seek the support of a business consultant in this regard. Do yourself the favor of involving your tax advisor in your plan from the very beginning to make the process fiscally sound.
When assessing the target company, the support of a management consultant with M&A experience can be useful in order to contrast your own enthusiasm with a realistic assessment and to carry out and document the due diligence professionally.
Finally, engage a lawyer experienced in M&A to draft a transaction agreement. Offer to draft the transaction agreement for the seller. This will give you the better structuring options.
Company acquisition and taxes: This is what you need to bear in mind
Depending on the type of investment in a company, the tax treatment resulting from the transaction differs.
In principle, the seller must pay tax on the proceeds of the sale. If he sells assets of his corporation in the form of an asset deal, the corporation must pay tax on its profit from the sale. The gain is measured as the difference between de<ned proceeds of the sale and the book value of the assets sold.
As a buyer, you can write off the difference between the purchase price and the book value of the assets acquired for tax purposes. In addition, as a buyer, you can recognize the financing costs for the purchase price payment as a business expense for tax purposes.
If you wish to acquire the shares in a corporation, it may be advisable for tax purposes to contribute the shares to a holding company. Provided you do not resell the shares sooner than seven years after acquisition, the sale can remain largely tax-free under certain conditions.
In any case, involve a tax advisor in your company acquisition process in order to set the course that makes sense from a tax perspective.