In the merger and acquisition (M&A) transaction, payment is one of the most important phases. There is no payment method that is suitable for all M&A transactions. Depending on the specific factors of each transaction, the parties can design appropriate payment terms. Regarding the payment process in M&A transactions, the following factors should be considered.
1. Case-Size and runtime of the deal
For certain domestic and simple M&A transactions, the parties may agree on a lump sum payment or two installments by bank transfer. However, in the case of complicated transactions with a long execution time, the buyer may request payment installments depending on the progress of compliance with the conditions precedent of the transaction. On the other hand, the seller can request a specific mode of payment making it possible to guarantee the financial capacity of the buyer, for example the obligation to open an escrow account with a legal credit institution. This method is often used for cross-border or complicated M&A transactions.
Each country has its own tax and exchange management regulations. Therefore, the tax counterpart plays an extremely important role, especially in M&A transactions where the seller has a commercial presence in many countries. Whereby, the seller has the right to select a specific legal person for the acquisition in order to benefit from the tax and financial regulations of that country. In some transactions, the parties may make the payment in a foreign country to benefit from the tax.
3. Charges for manufacturing Payment
Unlike the wire transfer payment method in simple or low-value M&A transactions, parties to complex and time-consuming transactions are more likely to opt for a single payment method or combinations that may require the intervention of one or more third parties during the payment process. For some payment methods, payment fees can cost a fortune. For example, in transactions using the escrow account with the lending institution or a third party, such as lawyers, the account management fee may be calculated as a percentage of the escrow value. Thus, the parties must negotiate and agree on who will be responsible for paying the service fees to the credit institution.
4.Ffriendly or hostile transaction?
In a hostile M&A transaction with a complete lack of trust between the parties, payment terms are more likely to be tightly stipulated. To secure payment, the involvement of third parties may be requested by the seller or the buyer when the payment terms are met. The conditions of the resulting payment obligation are listed and specifically agreed.
5. The Buyerthe level of confidence in a flare-up the shares acquired or capital contribution shares post-trade value
It is clear that, among other things, buyers tend to choose the equity payment method due to their lack of confidence. In this case, the assignors jointly bear part of the risk of a fall in the value of the shares or the capital contributions.
Accordingly, purchasers may use their own shares as payment for the acquired shares of the target companies instead of cash payment or they may combine these payment methods. By which, the buyers will become the owners of the target companies, and the sellers (shareholders of the target companies) will become the shareholders of the buyers.
Exchange of shares between companies is universally used for public companies. In addition, this mode of payment is officially recognized by certain legal documents issued by the government and the Ministry of Finance.
6. Motivate founders and managers of target companies
For certain transactions, the buyers wish to maintain the attachment of the founders and managers to the targeted companies. In some cases, the founders and directors may also be the sellers. In this case, the buyers can pay the sellers part of the acquisition price by the mode of payment of income according to the development of the target companies after a fixed period. Therefore, the higher the business growth rate, the greater the revenue payment from the sellers will be.