M&A and VC not only for startups: Share Deal vs. Asset Deal. What are the differences between them, what are the advantages/disadvantages for the buyer and seller.
As a rule, the parties at the preparatory stage of the transaction (preferably after signing the NDA, after the implementation of the economic, legal and tax due diligence of the target company - while we wrote about one of the forms of due diligence here, and generally prior to the preparation of the Letter of Intent or Term Sheet that we have written about here) discuss the above options for setting up the transaction structure, the decision on one of the options being taken in particular taking into account the state of the target company and the associated minimisation of risks associated with each type of transaction structure and the resulting amount of taxation on the part of the seller and/or the tax advantage on the part of the buyer.
Difference Between Share Deal and Asset Deal
Price Share Deal(all or most) of the equity interests in the target company (Share Purchase Agreement /SPA) are purchased and thus the buyer acquires the target company directly, with all its assets, rights, liabilities and obligations. It is not an exception that in preparation for the sale of the target company, before the implementation of the Share Deal, a certain partial activity and assets of the target company (non-core/carve-out) are transferred to a separate company established for this purpose (SPV).
On the other hand, at Asset Dealindividually defined assets (assets) of the target company (Asset Purchase Agreement /APA) or the entire enterprise are purchased. The target company (or, after the Asset Deal, only the so-called corporate shell) remains the property of the seller.
When purchasing individual assets of the target company, the buyer can choose which assets of the target company he is interested in acquiring (or which debts and whose employees he is interested in taking over) and which not. If the Asset Deal is realized in the form of the sale of the enterprise, such selection of assets (and debts and employees) is limited or prohibited without further ado (apart from the specifics of the sale of a part of the enterprise), since debts and employees pass by law together with the enterprise.
Advantages/Disadvantages of Share Deal and Asset Deal for Buyer and Seller
Asset deals are usually more expensive. All assets acquired must be listed individually in the transaction documentation for the Asset Deal (which may consist, for example, of agreements to sell the business or a combination of purchase agreements, assignment agreements, etc.), which can be time-consuming when preparing the transaction documentation.
At the same time, there is a risk thatthat some assets will be forgotten. The Asset Deal requires, with a few exceptions, the consent of the counterparties of the target company in the form of the conclusion of new contracts between the buyer and such (former) counterparty of the target company, or the consent of the creditors to assume the debts of the target company by the buyer.
Such actions, in particular obtaining consents, may delay the transaction. At the same time, such actions can lead to uncertainty and disruption of relations with counterparties, customers, employees and suppliers of the target company. Serious disruption to the relationship can also be caused if the Asset Deal goes bankrupt after it has been notified (which is usually necessary for its completion) to the counterparties, customers, employees and suppliers of the target company.
In the case of public law permits or licenses that have been issued to the target company, their transfer to the buyer in the Asset Deal mode may even be impossible or disproportionately expensive.
In such cases, it is preferable to opt for a Share Deal or, if a Share Deal is not an option, an Asset Deal in the form of a sale of the business, since in the case of the sale of the business the respective consents of the contractual partners and employees are not required in principle (e.g. in the case of employees, the rights and obligations under the Labour Code are transferred without their consent). Likewise, the risk of the key employees of the target company trying on this occasion to push for an increase in the salary negotiated with the target company disappears.
In the case of a Share Deal, on the other hand, existing contracts concluded between the target company and its contractual partners remain largely unaffected. However, it is not uncommon for key contracts between the target company and its contractual partners to contain provisions prohibiting or limiting the change of control.
These are provisions that give the contractual partners of the target company the right to terminate the contract with the target company in the event of a fundamental change in the ownership structure of the target company without the consent of the counterparty. Such change of control provisions include, for example, contracts with banks, typically credit agreements.
The transfer of shares or business shares is often simpler (there is no need for the consent of the contractual partners/employees of the target company) and, as a rule, a more tax-advantageous option for the seller. However, even the Share Deal (especially when it comes to transactions worth hundreds of thousands or millions of euros) contains its complexity.
In the complete takeover of the target company, including all its rights and obligations, quality due diligence is particularly important and the buyer generally requires a range of representations and warranties and corresponding indemnities or post-closing purchase price adjustment mechanisms.
As already outlined, with an Asset Deal, the buyer can choose which assets of the target company he is interested in acquiring and which not, and thus the scope of such a transaction is more easily customizable. Especially for target companies with a long and not quite transparent history, this model is less risky for the buyer. Similarly, in the case of a carve-out of a part business of the target company, an Asset Deal may be a more viable solution (for example, also in the form of buying the organizational component of the enterprise).
For the implementation of the Asset Deal, the approval of the general meeting of shareholders of the target company is not required in the basic legal setting of the company contracts/articles of association of the target companies, and the partners of the target company are also not parties to such transaction documentation. However, the approval of the general meeting of shareholders of the target company is required.
If the terms of the negotiated transaction include the retention of the founders or key managers in the target company within the agreed period and the binding of the final purchase price (Earn-out) to the agreed performance criteria (KPI) of the target company (usually EBITDA), the Share Deal represents a more advantageous structure, since the target company is sold as a whole economy unit, which facilitates precisely the tracking of those KPIs.
In the case of an Asset Deal, the target company remains with the remaining assets, liabilities and liabilities in the hands of the seller. Within the framework of the Asset Deal, one can also meet the buyer's request that the seller will be obliged to dispose of this corporate shell after the transaction is completed.
Basic tax aspects
Share Deal is generally more advantageous to the reseller from a tax point of view. Ideally, the target company is owned and sold by the holding company, thereby ensuring a 0% tax on income from the transaction at the level of the seller/holding company (assuming at least 10% of the business share/shares in the target company for a period of at least 24 months, provided that the economic substance is located in the Slovak Republic).
For Share Deal, VAT does not apply. In the event that a member of the target company or holding company (natural person) wants to pay income from the transaction as a dividend, he pays a tax of 7%. For the buyer, Share Deal is less profitable from a tax point of view.
On the one hand, it assumes the historical tax risks of the target company and, on the other hand, it is unable to implement an increase in the tax entry price of the asset to the acquisition (purchase) price (step-up) in order to depreciate/increase its taxable cost and reduce the tax base in the future.
On the other hand, as is clear from the above, Asset Deal is more profitable for the buyer from a tax point of view, since the assets acquired under the Asset Deal generate a higher potential for tax depreciation for the buyer in the future and a corresponding tax savings with the buyer's corresponding tax income.
On the other hand, in the case of Share Deal, the acquired shares/business shares of the target company are not subject to regular depreciation, so no tax advantage can be generated from this. Given the different tax interests of the buyer and seller, in the case of an Asset Deal, the seller will generally want to have a share of the buyer's tax advantage.
Any claim by the seller to compensate for his tax disadvantages in the Asset Deal is legitimate. The income of the seller from the Asset Deal can be up to about 31%, since income tax is applied at the level of the target company up to 24% and if the partner of the target company (natural person) pays the income from the transaction as a dividend, he pays tax at the level of 7%. In addition, VAT is applied to the Asset Deal (except the Asset Deal carried out in the form of the sale of the business).
Usually, the parties first negotiate the purchase price (cash and debt free) for a transaction structured as a Share Deal, before discussing the possibility of structuring the transaction as an Asset Deal. For a qualified decision, it is subsequently necessary to create a transparent model on the financial impacts after tax in both variants of the transaction, which is not an entirely simple task (and, as is clear, this article does not even have the ambition to cover the tax aspects of the transaction comprehensively).
How to make the right choice between Share Deal and Asset Deal when selling or buying a business
To make the right decision, between these basic transaction structures (Share Deal vs. Asset Deal) is beneficial as early as possible in the process of the transaction to carefully calculate and weigh the individual economic, tax, financial and legal options, consequences, advantages and disadvantages.
If you are considering selling or buying a trading company or their separate assets, our team of experts and external collaborators are ready to help you optimize the transaction to achieve your goals.