Share deal or asset deal – this is a question we frequently receive from our clients. What are the key differences? Which structure is more advantageous on the sell-side or the buy-side? Which structure is more common? What does the decision ultimately depend on? I will address these and other questions in this article.
Generally speaking, in company acquisitions, there are two main transaction structures. Most prevalent are share deals, where the buyer acquires all (or a certain percentage) of the shares in the target company from the seller. An alternative to these are asset deals, where the acquirer purchases certain tangible and intangible assets of a company. Typically, this would include relevant operating assets of the business (working capital, equipment, production site, customer lists, patents, selected contracts, etc.).
Now, whether you should choose to conduct your transaction as a share deal or asset deal depends on a number of factors.
Firstly – and maybe most obviously, the transaction background is important. Clearly, if the target for sale is not a separate legal entity, an asset deal is a good solution. The most common scenario for this would be to carve out a business unit from a corporate group. In addition, an asset deal could be suitable for a restructuring case, where a new owner would only take over the healthy operating business or certain assets of value, and not all liabilities of the company. At the same time, in classic transaction processes, you will mainly see share deals, as they are much more straight-forward from an administrative point of view.
A second point, which you may consider is the risk profile. In a share deal, you acquire the entire company with all assets and liabilities (on- or off-balance sheet). Of course, as a prudent investor, you will conduct your due diligence carefully. However, unexpected costs or liabilities could pop up after closing of the transaction. If this is not covered by the agreed warranties and indemnities in the share purchase agreement, you will need to cover these costs yourself. With an asset deal, it is possible to limit the scope of acquired liabilities. A brief word of caution must be mentioned here. There are legal restrictions to “cherry-picking” in asset deals. For instance, a buyer may be required to continue employment contracts in many jurisdictions. In addition, bear in mind that in an asset deal the target’s customers and suppliers may not agree to the new counterparty and may renegotiate terms or even terminate their contracts, which could create a different kind of challenge.
A third aspect, which is frequently discussed are tax issues. Of course, your preferred transaction structure from a tax perspective is going to depend on multiple parameters, such as your place of jurisdiction and the legal entity form of your business. At the same time, some tendencies prevail in most transaction scenarios. If possible, the seller usually prefers a share deal, because it allows for a lower overall tax bill in most scenarios (asset deals frequently lead to double taxation). As a buyer, you could possibly view this differently. The main reason for this is that in an asset deal, all acquired assets will be revalued to fair market value; this means potentially higher future depreciation and hence lower tax burden. Naturally, there are many exceptions. For instance, a significant tax loss of the target — which could be used to the buyer’s advantage in the future — could instantly change the equation.
As you have seen, the pros and cons of a share deal versus an asset deal very much depend on the individual situation. At MP we listen to our clients and remind ourselves that every company, every situation, and every transaction is unique. We believe the art of good deal-making is to identify the core aspects, which are important to the negotiating parties and to design the deal package and transaction structure accordingly. And then – we can get the deal done.
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