From a legal perspective, mergers and acquisitions are highly complex and often present numerous challenges. It is, therefore, crucial to recognise and prevent the opportunities of such new partnerships. However, above all, it is essential to consider the risks that could jeopardise the success of a transaction. The art of a successful M&A transaction lies in effective risk management that protects and promotes your rights and interests at all levels. A task that – in addition to precise planning – requires extensive legal experience and a deep understanding of the specific industries and markets.
The German law firm Schlun & Elseven offers skilled and committed legal advice. Our German corporate and M&A lawyers work closely with you to identify and minimise potential risks. Whether drafting or reviewing contractual agreements, monitoring transactions, or the company’s subsequent reorganisation – as a full-service law firm, we ensure that you are always legally on the safe side. Should any legal disputes arise, we will be at your side to enforce your claims quickly and effectively. Please do not hesitate to contact us to benefit from our extensive expertise.
Common Risks in M&A Transactions in Germany
M&A transactions always involve several risks — for both the seller and the buyer. However, the fact that these risks exist does not mean they cannot be avoided or minimised. Effective countermeasures can only be introduced by those who know what risks they can expect in the future.
In principle, the central risk in every M&A transaction is liability. Granting warranties and guarantees and excluding liability for certain aspects are all part of the liability issue. In a liability case, the parties usually try to demonstrate that the other party is liable. There is an immense risk that this argument will ultimately be to your disadvantage.
An M&A offers both parties the opportunity of tax benefits but also the risk of paying high taxes. Before the negotiations, it is essential to determine which conditions will have which tax consequences. The question of whether it should be an asset or share deal is also crucial. Both parties should consider this question and evaluate the consequences of each option.
During the negotiations, the seller is exposed to the risk of its intellectual property being infringed. This can involve information unintentionally disclosed to third parties and the exploitation of details disclosed in confidential discussions.
Data security is also an issue in M&A. Of course, it should never be neglected – even without an upcoming transaction. However, a cyber risk can arise or be exacerbated, especially in the context of a merger or takeover, when systems are adapted or reorganised. This also goes hand in hand with the company’s digitalisation issue. Whether the company is sufficiently digitalised has a significant impact on negotiations. If the company is not digitalised to the extent indicated, there are considerable risks on both sides. For the seller, liability risks are due to incorrect information. For the buyer, there is the risk of not being able to carry out the business processes that they had imagined and having to retrofit.
In addition to the risks that arise during the transaction or are directly linked to it, there are also significant risks further down the line. It is well known that a merger is not just about negotiating the best possible economic conditions. It is also crucial that the integration phase is prepared and carefully planned. Company goals, management styles and corporate values should play a role in the negotiations to ensure the transaction promises long-term success. Payment risks should also not be ignored. Delays or payment defaults can occur, especially when instalment payments are agreed upon, leading to liquidity problems and an enormous financial loss. The ever-relevant market risks should not be neglected. The economic and market-specific situation can never be predicted with certainty, so there is also a considerable financial risk here.
Methods of Risk Minimisation | Risk Management
One of the most important aspects of risk management is careful and efficient transaction preparation. Before you enter the negotiation phase, you should have worked out what is particularly important to you and where your limits lie. Careful preliminary considerations can minimise a considerable proportion of typical M&A risks, as you can develop suitable strategies and measures to counteract the occurrence of risks actively.
Ideally, you should consult an advisor who can provide you with professional support in pursuing your goals and minimising risks. They can initiate the appropriate strategies for you based on your wishes and limitations. Due diligence is of crucial importance in this context. It enables a reliable determination of the company’s value, considering all economic and legal obligations. Due diligence is essential for both parties to an M&A transaction and is enormously helpful in strengthening your negotiating position.
Essential methods of risk minimisation are therefore:
- Careful preparation with professional support,
- comprehensive due diligence,
- precise contract drafting,
- risk allocation,
- conclusion of appropriate insurance policies.
Our German corporate lawyers will support you right from the start and take care of the due diligence, drafting, and review of contractual documents. We also support you during the negotiation phase, helping you achieve your goals and adhere to your limits.
Recognising Avoidable Mistakes in the M&A Context
In addition to comprehensive risk management, which should be actively pursued, it is equally essential to avoid avoidable mistakes. Avoidable mistakes in the M&A context can be legal and financial in nature. They not only have an impact on the success of the transaction but also on the long-term profitability of the company. Avoidable mistakes include, in particular
- inadequate due diligence and misjudgement of the company valuation,
- careless assurance of guarantees and limitations of liability or careless waiver of such,
- lack of communication and lack of integration (especially in the case of mergers),
- failure to consult professional advisors.
An Overview: Frequently Asked Questions about M&A Transactions, Company Sales, and Company Acquisitions
M&A stands for mergers and acquisitions. An M&A transaction, therefore, refers to the process in which companies merge or one company acquires another. Overall, the term M&A is used for different types of company mergers and acquisitions. Even if the buyer of a company is not another company but an individual or a group of investors, the sale of the company is referred to as an M&A transaction.
A share deal involves the sale of company shares, while an asset deal involves the sale of individual assets or goods. The decisive difference is, therefore, the object of the sale to be designated. The choice of the form of sale has a significant impact on the entire transaction process, for example, on the form of the purchase agreement to be observed and the tax assessment.
Due diligence comprises a company’s strengths and weaknesses, opportunities, and risks. As part of this audit process, all economic, legal, tax, and financial circumstances are analysed and broken down.
The company value is the decisive factor in every M&A transaction. However, this is not only determined by the profit. Decisive factors, in addition to profit, are
- Profitability and earning capacity,
- turnover,
- amount of equity,
- fixed assets, inventories, and receivables,
- employment relationships,
- industry, location, and company size.
Practice Group for M&A
Practice Group for M&A
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