M&A terms defined

Share sale or asset sale, and why it matters

The first structural choice in any acquisition, and it affects tax, liability and complexity for both sides.

In a share sale the buyer acquires the company itself and everything in it — assets, contracts, employees, and all historical liabilities including ones nobody has found. Simpler to execute, because contracts and licences usually stay in place, though change-of-control clauses need checking.

In an asset sale the buyer acquires specified assets and assumes only specified liabilities, leaving the rest behind. Safer for the buyer and usually messier to execute, because contracts must be assigned individually, consents obtained, and employees transferred under the relevant employment protections.

Sellers generally prefer share sales, which achieve a clean exit. Buyers generally prefer asset sales, which limit inherited risk. The tax consequences frequently decide it, and they differ enough by jurisdiction and circumstance that this is the one point where specific advice is unavoidable rather than optional.

Locked box or completion accounts

Two ways of fixing the final price, and the difference is worth understanding before agreeing either.

Under completion accounts, accounts are prepared as at the completion date and the price is adjusted for actual debt, cash and working capital. Accurate, and it leaves a period of uncertainty and a common source of post-completion dispute.

Under a locked box, price is fixed by reference to a historical balance sheet date. The buyer takes economic risk and benefit from that date forward, and the seller undertakes not to extract value in the interim. Cleaner and increasingly preferred, provided the reference accounts are reliable.

The practical implication for a seller: under a locked box, cash generated between the reference date and completion belongs to the buyer. That is entirely fair and consistently surprises people who have not had it spelled out.

Index of terms

Asset sale

A transaction where specific assets and liabilities are acquired rather than the company itself, allowing a buyer to leave unwanted liabilities behind.

Basket

A threshold below which warranty claims cannot be brought. A true excess allows recovery only above it; a tipping basket makes the whole amount claimable once crossed.

Bolt-on acquisition

A smaller acquisition made by an existing platform business to add capability, geography or scale.

Break fee

A payment due if a party walks away from an agreed transaction in defined circumstances.

Cap

A ceiling on total seller liability for warranty claims, usually expressed as a percentage of consideration.

Change of control clause

A contract term allowing a counterparty to terminate or renegotiate if ownership of the business changes.

Completion accounts

Accounts prepared as at completion to determine final price adjustments, typically for debt, cash and working capital.

Condition precedent

Something that must occur before completion can happen — a regulatory approval, a third-party consent, a liability settled.

Consideration

What the buyer gives for the business: cash, shares, deferred amounts, or a combination.

Data room

The indexed repository of documents made available to a buyer for due diligence.

Disclosure letter

The seller's qualification of the warranties, setting out what is actually true. A buyer cannot claim for something properly disclosed.

Drag-along

A right allowing majority shareholders to compel minorities to join a sale.

Earn-out

Consideration deferred and contingent on post-completion performance against agreed targets.

Escrow

Consideration held by a third party for a defined period, available to the buyer if warranty claims arise.

Exclusivity

A period during which the seller agrees to negotiate with only one buyer. The point at which leverage transfers from seller to buyer.

Heads of terms

A summary of agreed principal terms ahead of full documentation. Mostly non-binding, though exclusivity and confidentiality provisions usually bind.

Holdback

Consideration retained by the buyer rather than an escrow agent, against potential claims. Less protective for a seller than true escrow.

Indemnity

A promise to cover a specific identified risk directly, without the buyer needing to prove breach in the way a warranty claim requires.

Information memorandum

The seller's document describing the business, its performance and its prospects, issued to interested parties under NDA.

Letter of intent (LOI)

A document setting out price, structure, conditions and exclusivity ahead of detailed diligence.

Locked box

A pricing mechanism fixing the price by reference to a historical balance sheet date, with no completion accounts adjustment.

Material adverse change

A clause allowing a buyer to withdraw if the business deteriorates significantly between signing and completion.

Quality of earnings

Financial diligence establishing what a business genuinely and sustainably earns, stripping out one-offs and accounting choices.

Sale and purchase agreement (SPA)

The principal contract governing the transaction: what is sold, for how much, when paid, with what warranties and indemnities.

Share sale

A transaction where the shares in the company are acquired, so the buyer takes the company with all its assets and liabilities.

Synergies

Cost savings or revenue gains available to a specific buyer from combining the target with their own operations.

Tag-along

A minority shareholder's right to join a sale on the same terms when a majority holder sells.

Vendor due diligence

Diligence commissioned by the seller before a process, so findings are known and addressed before a buyer discovers them.

Warranty

A statement of fact about the business in the sale agreement, which the seller may be liable for if untrue and loss results.

W&I insurance

Warranty and indemnity insurance, transferring warranty exposure to an insurer so the seller achieves a cleaner break.