Once the decision to sell has been made by the entrepreneur or the shareholders and the company has been adequately prepared for a sale, the actual sale process can begin. A not-so-unimportant question is what specifically is to be sold. Is the entire company for sale? Is it only the business operations or 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 will determine whether a share deal or an asset deal is appropriate for the transaction.
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 they take over the shares, they are liable for everything connected with the company and must therefore thoroughly inform themselves about your company before making the purchase. Their due diligence will be comprehensive so as not to find “a pig in a poke” after the purchase. To cover themselves, the buyer will also demand comprehensive guarantees from you. This is common practice.
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 prior to the time of the transaction now triggers justified claims for compensation from a customer. The purchaser must then fulfil these claims – unless appropriate guarantees from the seller were included in in the purchase agreement that there would be no complaints.
In particular, the prospective buyer will find out about contaminated sites, about polluted soils, about contracts and about possible legal disputes, and will demand corresponding guarantees. If you as the seller have a clear conscience, the share deal will be a clean cut for you. This is because you are ceding all obligations associated with the business with the contract agreement (signing).
With an asset deal, the buyer acquires defined assets, a line of business, contracts, or rights to businesses, etc. Everything that is not explicitly listed, is not bought and remains with you. For the buyer, this is a way to rule out buying “skeletons in the closet”. Due diligence can be kept simpler.
Buyers will try to make an asset deal with you because they can then “cherry pick.” But that means that the assets, contracts, employees, machinery, etc. that don’t interest the buyer will stay with you. You must have a meaningful use for them or find a solution.
While 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 in one contract, an asset deal may require the review and re-execution of many individual contracts.
Tax considerations may also influence buyers or sellers on the decision between a share deal or an asset deal. Namely, in an asset deal, the buyer can write off the acquired assets for tax purposes. In a share deal, the acquired company can write off the assets. In this case, it is advisable to obtain a tax expert opinion.
But a share deal can also enable the buyer to benefit. For example, if they acquire a property in connection with a share deal, this may mean that they do not have to pay real estate transfer tax, which they would be obliged to pay if they 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 themselves may acquire a maximum of 94.9% of the company shares. For control over 100%, they need a silent partner who acquires at least 5.1% of the shares. Here, we can only give advice on structuring, but not on taxation. It is recommended you involve a tax advisor with M&A experience at an early stage. In any case, the share deal model seems to be particularly popular with real estate groups.
If, as a seller, you have worked out your preference for a share deal or an asset deal together with your tax advisor, you should have a business valuation carried out in order to define a realistic price range.