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There are different reasons for buying a company.

Through non-family succession in the SME sector, an experienced manager can take the step into self-employment by buying a company.

However, there are also regular strategic company acquisitions with the aim of acquiring market competitors or companies along one’s own value chain within the framework of M&A transactions in order to expand one’s own business model or to gain market share or grow faster through these company acquisitions.

A company purchase is usually referred to when a clear majority (often >75%) of the shares in a company are acquired. The purchase of company shares is also referred to as a share deal. 

An asset deal is the purchase of assets, divisions or business units as part of an M&A transaction. In this case, it is not the legal entity that is acquired, but separate assets that must be precisely named or listed.

In a share deal, the shares in the company are taken over by the acquirer. Only the owner or shareholder of the company changes. Since the company is retained and transferred with the sale of shares, the buyer also takes over all contractual obligations and rights in relation to customers, suppliers and financing partners as well as all assets.

An asset deal is the acquisition of parts of a company or business assets from an existing company that is not itself a separate legal entity. These assets are usually acquired by a company in which they are newly merged as an operational unit or business division. In order for all operationally necessary assets to be transferred, they must be individually defined and transferred. As a rule, all contracts with customers, suppliers and financing partners must be redrafted by the buyer, as these were concluded with the selling legal entity. An exception is made for employment contracts, which are transferred with all rights to the acquirer in the context of the asset deal. 

The share deal is usually much simpler and faster to implement than the asset deal, as all contracts with customers and suppliers remain in place for the time being (if there is no “change of control” provision) and the individual, operationally essential assets do not have to be defined separately – as is the case with an asset deal.

Of course, tax or accounting policy reasons may also speak in favour of an asset deal; this must be examined in each individual case.

First, the buyer should be clear about the strategy or investment idea underlying the purchase. Once this is defined, possible target companies can be identified, if necessary with the help of an M&A consultant, and prioritised in internal discussions. In the next step, the decision-makers of the possible target companies are approached (anonymously if desired) and their basic willingness to sell is checked. If there is an interest in entering into sales talks, the next step is to request the necessary documents for the due diligence and to develop a joint timetable. Parallel to the due diligence and the subsequent negotiation of the purchase agreement, often defined key persons get to know each other in order to work together on the implementation of the M&A transaction and to develop a strategy for the joint future. A tour of the target company is also part of this phase of the M&A process. 

After an agreement on the purchase contract, the company purchase is carried out in accordance with the necessary formal requirements (for example, by notarisation with the notary).

The costs of a company acquisition are usually between 5% and 10% of the transaction value, depending on the size and complexity of the target company. These costs include legal and tax advice, M&A advice and notarisation/execution costs.

There are different methods to determine the value of a company.

If the buyer has a detailed business plan or is in a position to draw up such a plan for the target company on the basis of his knowledge, a detailed discounted cash flow method (DCF for short) can be applied.  In this method, future financial surpluses in the form of cash flows are discounted to the valuation date.

If there are comparable public company transactions or comparable listed companies, a multiples method is feasible with significantly fewer key figures of the target company. 

For example, this simplified method uses the average EBIT (earnings before interest and taxes) of the last 3 years multiplied by the relevant industry multiple (often between 4x and 8x) and the net financial liabilities subtracted.

A company is a very complex object to buy, not least because the buyer has to be aware of the interpersonal peculiarities among employees and with customers and suppliers.

This is certainly one of the most difficult parts of a due diligence – along with the technical examination of finances, taxes, environmental regulations, the operational business, IP situation, legal peculiarities and the state of the current industry cycle.

In addition, the financing of the company acquisition must be calculated, structured and clarified with the financing partners. Enough financial resources should always be available to be able to cope with economic fluctuations or operational challenges. 

Another major complex is the regulation of responsibilities and capacities. Is the new management able to take over the management in the short term? Are their capacities and know-how sufficient? Is it possible and does it make sense to involve the  seller in the management for a while longer? Or are there suitable employees for new management functions within the acquired organisation?       

The duration of the purchase of a company depends on whether the seller has prepared for this M&A transaction and whether all relevant information has already been gathered in advance.

If this is the case, due diligence, structuring and application for debt capital and purchase agreement negotiations are possible in 3-6 months.

If all relevant documents and information are only compiled by the seller during the due diligence process upon request (this is regularly the case in transactions without an M&A advisor), the acquisition process is more likely to take 8-12 months.

The market value of a company – as with all other goods – depends on the relationship between the supply by the seller and the demand by the buyer.

For listed companies, this is easy to calculate, as the current value of the shares multiplied by the number of shares gives the market capitalisation and thus the market value of a company.

For unlisted companies, the determination of the market price is much more complex. Although the company valuation is a first indication for a market price, in the end the offers for the purchase of the company submitted by interested buyers within the framework of an M&A process are the decisive market assessments. If one of these offers corresponds to the seller’s ideas and the M&A transaction is implemented, this will also be the market price of the company. 

The balance sheet total is suitable for getting an idea of the size of a company in relation to other companies within the respective industry. However, the company value cannot be derived from the balance sheet. The company value depends on the long-term profitability and the associated cash flow.   

In most cases, a complete business valuation takes about 2 to 4 weeks. It is important to bear in mind that a detailed business valuation requires an integrated business plan that includes profit and loss account, balance sheet and cash flow. 

Only when this detailed planning has been prepared together with the management, the M&A advisor can carry out the business valuation and subsequently document it, including explanations and comments.

The M&A advisor first helps the interested buyer to define the investment focus. Exactly what kind of company is being sought, in what region and of what size? Once the focus is clear, the M&A advisor can research a list of possible target companies (long list) and filter it together with the prospective buyer according to individual specifications. The resulting list of suitable target companies (short list) can be used by the M&A advisor for an anonymous initial contact with the target companies. Once a shareholder willing to sell has been found from the group of target companies, the M&A advisor defines the documents necessary for the due diligence with the seller. The advisor helps the buyer to set up and implement the due diligence and to determine the appropriate company value and, if necessary, the necessary financing structure. The M&A advisor also assists in negotiating the economic terms of the M&A transaction. It is not uncommon for an experienced M&A advisor to be the “bridge builder” who develops a solution to combine the different economic interests of the buyer and seller, thus making a transaction possible in the first place.   

When a company is purchased via share deal, only the owner or shareholder changes. Current contracts, such as with customers and suppliers, but in particular also employment contracts, remain unaffected by the sale of the company. An exception are possible contractual “change-of-control” provisions with customers or suppliers.

This logic only applies to the share deal; in the case of an asset deal, the contracts with customers and suppliers usually have to be concluded anew. Employment contracts in Germany, for example, remain in place with all rights even after an asset deal.

There are now a large number of platforms on which companies for sale are listed. For example, many chambers of commerce and industry or chambers of trade offer their own virtual platforms or solutions in a network via Nexxt-Change, while other private providers such as the Deutsche Unternehmerbörse (DUB), DealCircle or Dealsuite complement the offer.

Of course, the entrepreneurs who are willing to sell place their offers themselves and therefore there is only a small selection of companies looking for buyers on each platform.  Companies are often sold without being publicly advertised on virtual platforms. This is where the personal network of an M&A consultant is worthwhile. He/she is constantly offered new transaction opportunities, often even before they come onto the market.

If you have a specific focus and are looking for a company from a certain sector, region and/or size, it is also advisable to proactively and, if necessary, anonymously get in touch with suitable companies with the help of an M&A advisor.