When considering the sale or purchase of a business, you have several options for defining what exactly you are selling or buying. The choice of the right type of transaction also factors in the tax implications for both the seller and the buyer, as well as whether the chosen form is common in the market.

The first type of sale or purchase of a business can be a so-called "Share deal."

In a Share deal, the subject of the sale is the company's business shares or stocks. If the owner sells 49% or less of the shares, it is referred to as a sale of a minority stake. If 51% or more is sold, it is considered a sale of a majority stake.

When determining which portion of the business you prefer to sell, it is important to consider the type of buyer you want to attract. A strategic investor may be interested in purchasing 100% of your shares/stocks. A financial investor will want to gain control of the company and will be interested in acquiring at least a majority, if not 100% stake. Based on our experience, both financial and strategic investors may offer a certain minority stake, such as to the existing management of the selling business, in order to motivate them and ensure a smooth transition of management to new executives or management (nominated by the new majority owner). We will delve into the types of buyers in more detail in the next part of our series, which will be published soon.

Not selling 100% of the shares/stocks can be a negotiating tactic. If you find that negotiations with the buyer are complex and you cannot agree on the price, consider selling only a portion of your stake/shares and provide the buyer with the opportunity to acquire the remaining shares/stocks later, perhaps through an option or pre-emption right. Based on our experience, not selling a 100% stake is possible even in the conditions of the Slovak market, although it is rather exceptional. The reasons for selling only a portion of the stake can vary, such as the desire to bring in a partner who will bring new opportunities, contracts, know-how, or the aim to secure a financially strong partner to fund the business's development in the future.

The second type of sale or purchase of a business can be a so-called "Asset deal", where the subject of the purchase is the actual assets or a set of tangible/intangible property. In this case, the relevant property laws must be observed. A typical example could be the sale of real estate that generates income for the seller in the form of rent from third parties.

In an Asset deal, only specific assets (and liabilities) are sold. Employment contracts with employees or customer contracts are also considered assets and can be transferred from the seller to the buyer. An Asset deal may be more advantageous for the buyer, but its execution can be much more complex because all transferred assets must be precisely defined and valued.

An Asset deal can be used when you want to continue your business but are interested in selling only a part of it. An example could be the sale of a separate division that operates independently from the rest of the company. If you want to sell the entire company, a share deal may be more advantageous for the seller. The buyer may prefer an Asset deal primarily because it involves less risk, as there is no need to scrutinize the history of the selling company, as no shares or ownership stakes of the seller are being purchased.

A specific type of Asset deal is called a "Carve-out". In our context, it is often defined as the transfer of part of a business or the entire business.

A Carve-out represents a situation where not only a separate significant asset or a set of assets (e.g., a building, manufacturing machinery) is sold, but all transferred items as a whole meet the criteria for the definition of a company. This means that long-term assets, inventory, cash, financial accounts, trade receivables, and liabilities, as well as employees and significant contracts, are transferred as a whole. Public-law obligations are usually not part of the carve-out, especially tax obligations or obligations arising from public health and social insurance.

In a carve-out transaction, close collaboration with accountants, tax advisors, and lawyers is necessary to properly define what falls within the transferred part of the business or department, which employees and contractual relationships will be subject to transfer. After the transaction, ongoing collaboration with the seller may be necessary to maintain specific services from the seller. For example, if the business unit you want to carve out uses IT infrastructure, accounting software ERP, and other services (e.g., HR) provided by the seller. In these cases, a written agreement specifying the type of services to be provided, the duration, and the price is required. These types of agreements are known as Service Agreements or Service-Level Agreement (SLA).

Our findings from transactions in which we have assisted:

• A share deal is more advantageous for the seller at the moment if they can take advantage of income tax exemption when selling a business share or shares (e.g., after meeting the 24-month holding period and having more than a 10% stake in the selling company).
• When a minority partner enters or a majority stake (but not 100%) is transferred, it is crucial to agree on the rules of joint operation = to have a signed Shareholders Agreement (SHA).
• Different visions of the seller and the buyer regarding the price of the selling company can be "bridged" by using so-called earn-outs. This represents an increase in the purchase price or an additional payment to the purchase price if pre-defined parameters are met (most commonly revenues or EBITDA).
• The choice of the type of business sale is often limited or influenced by various specific circumstances, such as a company license tied to a registration number that is not transferable; the existence of potential legal disputes; the transfer of an asset subject to the consent of a key business partner, and the like.
• Gradually, the so-called ESOP plans, i.e., stock option plans designed for top management who remain with the company even after the acquisition, and receive an extra incentive to achieve results, are being applied.
• In the case of carve-outs, it is important to have pre-negotiated conditions of the so-called SLA agreement (at least at the Head of Terms level) so that both the seller and the buyer have defined what is expected from whom (including in financial terms).