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Tips and Traps on business M&A

Date: 19/06/2022

Business mergers and acquisitions are a means to potentially create shareholder value but you need to do your due diligence and get the structure right in the first place.

There is a lot of hype and intrigue around mergers and acquisitions – and with good reason.

Done properly, they can be a very effective way for a business to grow and generate more profit. However, they are not for the faint-hearted and, like any business deal, they must be structured and executed well to get the best outcomes. (Cultural clashes may also present challenges, though that’s for another topic!)

First up, let’s explain what these deals are all about. Even though ‘mergers’ and ‘acquisitions’ are often lumped together under one descriptor – M&A – the two words have different technical meanings and the components within such deals also differ significantly.

A merger involves two or more entities joining forces to form one new business, whereas an acquisition relates to one business acquiring or taking over another entity. The latter is commonly completed by either purchasing ownership of company shares, or by taking over the assets of the company.

Choosing the right structure

Structuring an M&A deal typically entails three options:

  • an asset purchase – this involves buying all or some of the assets owned by a company, while leaving ownership of the business with the seller. Typically, these assets include goodwill, current supply contracts, plant and equipment, leases, stock-in-trade and intellectual property.
  • a share purchase – as the name indicates, this involves buying some or all of the shares in a company, and therefore taking over the seller’s assets and liabilities.
  • a merger – under this arrangement, two companies combine to form one legal entity, and the target company’s shareholders receive cash, buyer company shares, or a combination of both.

Pros and cons of an asset purchase

An asset purchase is often the best structure for the selling company if it prefers a cash transaction. This approach also allows it to continue as a corporate entity if required after the sale, while holding the remaining assets and liabilities.

For the buyer, one of the key advantages of this structure is that it allows the flexibility to decide which assets it wants to acquire from the seller, and which ones it leaves alone. Usually, the liabilities remain with the selling company, while the sale may be treated as a ‘going concern’, which can result in no requirement to pay GST on the deal.

In terms of disadvantages, the buyer may not be able to acquire non-transferable assets such as goodwill and is also likely to have to pay Stamp Duty on the transaction. For the seller, the M&A process can be particularly complex and take time as it involves transferring assets such as contracts, property and equipment leases to the purchaser.

Pros and cons of a share purchase

Taxes on such a transaction are often minimised, particularly for the seller. For example, one of the tax concessions for sellers is that GST is generally not payable on the sale of shares.

There are potential hurdles for the sellers, though. As the company retains all liabilities of the business, it may be required to provide extensive warranties and indemnities, and part of the purchase price may have to be held back for a period of time to protect the buyer against any warranty breaches. The directors of the selling entity may also have to provide personal guarantees that could expose them to personal liabilities. The breadth and depth of these personal guarantees is often a key negotiation point between buyer and seller.

For buyers, a challenge often exists around uncooperative minority shareholders who may not support the takeover or the goals of the new owner. They should also be aware that the company retains all past, current, future and contingent liabilities of the business on completion of the deal, including any tax liabilities.

On the flip side, if purchasers are acquiring a company with a great brand and lots of goodwill, a share purchase is a great way to capitalise on those strengths. There is also no need to deal with specific transfer formalities involving elements such as contracts, business names, leases and intellectual property, so third-party consents are typically not needed.

Pros and cons of a merger

Merger structures are usually less complicated than acquisitions because liabilities and assets do not have to be separated – they simply become part of the new entity. This structure typically only requires the agreement of a majority of the target company’s shareholders, too, so the deal can still go ahead if there are a small number of dissenting shareholders.

A potential disadvantage with mergers is that conflicts of culture can occur between the two joining parties, which can in turn cause employee stress and business uncertainty.

Proceed with caution

For any M&A deal, regardless of the structure, all parties should conduct considerable due diligence and seek Accounting and Legal advice before acting. It is especially advisable to get specialised tax advice in advance of any transaction because there are often significant – and potentially hidden – implications on this front.

Weighing up all these considerations with the support of experienced professionals will give you peace of mind – and the best chance of executing a positive transaction that delivers a profitable future for all entities.

To find out more about mergers and acquisitions and how to structure such deals, speak to one of our Adrians tax and advisory specialists.