Acquisition

What it means

An acquisition is the purchase of another company or part of one. It usually takes one of two forms: the buyer takes a majority ownership interest or shares, so the company as a legal entity remains and only the owner changes, or it buys the business itself or part of it, meaning assets, contracts and staff, without the company as such.

The choice of form has major consequences. Buying a stake means taking on the company with all its history, including hidden debts and tax risks. Buying the business lets the buyer choose what it takes, but the transfer is administratively harder and follows different tax and accounting rules.

An acquisition is usually preceded by a non-binding letter of intent or term sheet, then due diligence and contract negotiation. The price often combines a fixed part with an earn-out, a deferred payment based on future results that bridges the seller’s and buyer’s differing views of value.

How it works in practice

On the buy side we prepare the financial and tax parts of due diligence: we check the quality of earnings, normalised EBITDA, working capital, tax risks and related-party transactions. The findings feed into the price and into the representations and warranties in the contract.

In the buyer’s accounts a purchased stake is shown as a long-term financial asset. When a business is bought, the price is allocated to the individual assets and liabilities at fair value and the difference is goodwill, which is amortised. A buyer that controls a subsidiary may become obliged to consolidate.

On the sell side we deal with the tax on the sale proceeds. For an individual, selling a stake may be exempt once a holding period test is met, while for a company the exemption applies only under certain conditions. It pays to set the deal structure before a price is agreed.

What to watch out for

The costliest mistake is skimping on due diligence when buying a stake. The company carries all its liabilities, including those off the balance sheet, such as open tax years, employee disputes or guarantees for others’ debts. Only well-drafted seller representations and warranties and a retained part of the price protect against them.

Watch the earn-out too: if it is tied to profit and the buyer then changes costs, reallocates overheads or merges the company with another, the seller may never receive the agreed payment. The contract must therefore define exactly what the result is calculated from and by which rules.