Asset deal or share deal: the decision is made before the notary

In a process we advised on some time ago, price and timetable were settled after four months, before anyone had asked whether the house should pass as an asset deal or as a share deal. Clearing that up afterwards cost both sides a further six months.

This question belongs at the beginning of a process, because it forms part of the price. What follows sets out the two structures and names the points at which they diverge; it does not replace advice, because the tax and legal review in the individual case belongs to your tax adviser and your lawyer, in Austria, Germany and Switzerland alike.

In an asset deal you buy things, in a share deal a company

In an asset deal the buyer acquires individual assets, which is to say the land, the building, the equipment and, depending on the agreement, contracts and rights as well, with every item named and transferred separately. The buyer gets exactly what the contract says.

In a share deal he acquires shares in the company to which the hotel belongs, so that the company remains the owner and only the shareholder changes. With that the buyer gets everything that lies inside that company, including what he has not seen.

Most of the negotiations that follow are explained by this difference.

The tax burden often decides who wants which structure

Seller and buyer rarely have the same interest here, because the seller looks at the taxation of his capital gain and at the question of whether hidden reserves in the company are realised, while the buyer looks at the incidental acquisition costs and at whether he can depreciate the acquisition.

In an asset deal the buyer as a rule obtains new book values and with them a new depreciation base, while in a share deal he carries on the values of the company. Over the holding period that is a considerable difference in ongoing tax.

With real estate transfer tax the picture often reverses. Austria, Germany and Switzerland attach it to the transfer of land and also capture transactions in which shares come together in one hand to a certain extent. Rates, thresholds and exemptions differ from country to country, in part from canton to canton, and they are amended regularly, so that only current advice on your own case can be relied on here.

Value added tax comes on top of that, being treated differently for transfers of land and for the takeover of a business. That too is a matter for tax advice and not for the broker.

The business hangs on contracts, not on the land register

For a hotel a second difference is often more important than the tax, because a hotel lives on ongoing relationships.

In a share deal the contracts remain untouched, because the contracting party is still the same company, and that applies to the lease, the management agreement, the franchise, suppliers, insurers and employment relationships alike. The business carries on unchanged after the transfer.

In an asset deal, by contrast, each of these relationships has to be looked at separately. Some contracts pass over by operation of law, for instance in the context of a transfer of undertaking, others need the consent of the other side, and that is exactly where third parties hold their leverage. A franchisor whose consent is required is at that moment negotiating about more than the consent.

Trade law authorisations and licences also attach to the person of the operator, which is why the question of whether a permit passes over or has to be obtained anew belongs on the checklist before a handover date is promised.

In a share deal you inherit the past

The reverse side of continuity is liability, because whoever buys a company buys its history with it: outstanding levies, tax audits, contamination in the ground, employment law claims and provisions that were set too low.

The due diligence in a share deal is therefore broader and reaches beyond the property into tax, company law, employment law and insurance. It costs more time and more fees, and it is the reason why this structure is often disproportionate for small transactions.

In an asset deal the circle is narrower but not empty, because the buyer of a business can be answerable for certain liabilities of the undertaking he has taken over. The idea that an asset deal leaves every past behind is therefore not correct.

Foreign buyers also examine land transfer consent

Whoever buys from abroad has one more question to settle. In Austria the federal provinces regulate land transfer independently; in Switzerland the federal act on the acquisition of real estate by persons abroad limits acquisition, but provides exemptions for commercially used property.

Neither set of rules asks only who is entered in the land register, but also who controls an acquiring company. A share deal therefore does not avoid a consent requirement, it merely shifts the point at which the review takes place.

Build the administrative steps into the timetable before you promise a handover date, because a closing that waits on a consent costs both sides money and patience.

Warranties do not replace a review

The usual answer to liability risks is a set of representations in the purchase agreement, together with retentions, escrow accounts or an insurance policy for warranty risks. These are serviceable tools, although they presuppose a seller who is still reachable and solvent in three years.

Where a company holds nothing after the sale but the purchase price, a warranty without security is worth little. This question is asked too rarely and is often more important than the wording of the clause.

Settle the structure before the price negotiation

The structure is a component of the price at the beginning and not a formality at the end, because an amount is not comparable without the structure that belongs to it: the same purchase price means different after tax outcomes for both sides in an asset deal and in a share deal.

In practice a simple order has proved itself. First both sides settle with their advisers which structure they can bear, then the price is discussed with the structure as an express assumption, and only after that come the letter of intent and the review.

Where this order is reversed, one negotiates twice, and the second negotiation goes worse than the first, because both sides have already done their sums. That is precisely what happened in the process mentioned at the outset.

The structure is part of the price. If you would like your case assessed before this point is set: confidentially, in a conversation, together with your advisers.