Getting advice
As mentioned in the introduction, the process of taking over a business in Luxembourg can be quite long and complicated, therefore one of the first steps to be considered, if not the first one, is to get good advice. There are several possibilities to obtain specialized advisors:
- Large international firms: large international firms such as KPMG, EY and BDO offer comprehensive mergers and acquisitions (M&A) services, including target identification, valuation, due diligence and transaction structuring.
- Specialized boutiques: local firms such as Tenzing Partners specialize in M&A advisory for companies in Luxembourg and can provide the necessary advice.
- Law firms: firms such as Arendt can provide specialized advice on legal, regulatory and tax aspects of corporate transactions in Luxembourg.
- Chamber of commerce and business organizations: the chamber of commerce is an excellent alternative for obtaining advice. In Luxembourg, the Business Transfer team of the Chamber of Commerce and the Chamber of Commerce can accompany you through the different stages of the process by analyzing the feasibility of your project and defining with you the key steps and measures to be fulfilled to formalize your project. In addition, the Chamber of Commerce's House of Training organizes a five-module classroom course that addresses the essential aspects of acquiring a company.
Preliminary assessments
The next step to consider once you have secured the necessary advice is to conduct some preliminary assessments, which include conducting a preliminary market and industry analysis and identifying a target company.
Preliminary market and industry analysis
This process involves assessing the industry in which the type of business or company to be acquired operates, including its size, trends, competition and growth projections. The regulatory framework that applies to businesses in that sector should also be considered, this is especially important in highly controlled industries such as finance or healthcare.
Another important aspect is to understand the local dynamics, in other words, to know how the target market is presented and developed in Luxembourg. This analysis will be of great help in identifying risks and opportunities and in assessing whether the market is attractive and whether the type of business you have in mind has the potential to thrive under current and anticipated market conditions.
Identifying the target company
Once the market is known and the type of business to be acquired is clear, it will be necessary to identify a target company. At this point, an indispensable resource is the national platform for business transfer businesstransfer.lu created by the House of Entrepreneurship of the Chamber of Commerce and the Chamber of Commerce in collaboration with the Ministry of Economy in 2021. This platform aims to bring together all the offers of transfer and acquisition of all the companies established in Luxembourg, there, it is possible both to publish an offer of sale and to consult the available advertisements in view of a possible acquisition.
Consider the two forms of takeover
There are two ways of transferring a company, the first way is through the transfer of assets and the second way is through the transfer of shares. The choice of the form of transfer depends on a wide variety of factors which include the objectives in mind, the personal and financial situation, the legal structure of the company to be acquired, the tax considerations, the risks involved in each case and the administrative complexity, among many others. Below we will briefly look at some of the particularities of each of these two options.
Transfer of shares:
The share acquisition is a form of business transfer in which the buyer acquires the shares or participations of the target company. In this type of transaction, the buyer becomes the new owner of the existing legal entity, assuming all its assets, liabilities, contracts and obligations. This structure allows for uninterrupted operational continuity, as the company maintains its legal identity. It is particularly attractive when the target company has licenses, contracts or valuable intangible assets that are difficult to transfer. From a legal and administrative perspective, it is often simpler, although it requires thorough due diligence to fully understand the inherited risks and liabilities.
It is possible to acquire shares in different types of companies and the tax implications are different in each case:
- Capital companies: there is no tax impact for the acquirer who takes over only the shares of the company, which remains the owner of the assets.
- Partnerships: as the assets of the company are transferred to the partners, the transaction is treated as the acquisition of a company and may give rise to the payment of VAT or registration duties.
Transfer of assets:
This mode of transfer involves the total or partial purchase of the goodwill, which refers from a legal point of view to all tangible and intangible elements acquired at the time of acquisition.
This structure offers greater control over what is acquired and is especially useful when the buyer is interested in specific parts of the business or when there are significant concerns about hidden liabilities. However, it can be more administratively complex as it requires the individual transfer of each asset and the renegotiation of contracts and licenses. This mode of transfer also has significant tax implications:
- If the buyer acquires the entire goodwill: in this case, the buyer is exempt from VAT, the Luxembourg Tax Agency (ACD) considers that the existing business activity is continued and that whoever takes over the company assumes the rights and obligations of the company in terms of VAT. However, certain elements of the goodwill, such as the assignment of the lease, may be subject to pro rata registration fees.
- If only part of the goodwill is purchased: the buyer may be subject to VAT on the purchase price of only certain items, such as the lease rights. On the other hand, the seller will be taxed on any capital gain realized on the sale.
Initial contact and preliminary negotiations
When the time comes to make the first contact it is important to keep in mind some considerations and be careful as this initial step lays the groundwork for a potential transaction and requires a combination of tact, strategy and careful preparation. This is a delicate moment that must be handled with discretion and professionalism.
Discretion is the fundamental principle of the first contact with the potential company, it is necessary to contact the head of the company directly and customers, employees and suppliers should not be informed directly.
Once the initial contact has been established, the next step is the signing of a non-disclosure agreement (NDA). This legal document protects sensitive information that will be shared during preliminary negotiations. After signing the NDA, the potential buyer usually requests basic information about the company that may include the following items and helps the buyer assess whether it is worth proceeding with more detailed negotiations:
- Company history.
- Economic situation and general financial data.
- Information on the organizational structure.
- Future prospects.
- Reasons for selling.
- Life cycle stage of products and services.
- Main customers and suppliers.
- Market situation in the industry.
- Overview of operations.
During these preliminary negotiations, the buyer must show genuine interest and the ability to complete the transaction, while the seller must provide sufficient information to maintain the buyer's interest without revealing critical details of the business at this early stage.
Due diligence
The next step is to analyze the company in detail, all relevant aspects of the target company must be thoroughly and thoroughly examined and analyzed before proceeding with the transaction.
For this first step it is of vital importance to have a team of experts in different fields such as lawyers, accountants or industry experts. Here the advisory team mentioned throughout the beginning of this guide will be of great help.
A thorough due diligence should include:
- A financial review: financial due diligence is generally the most extensive component. It involves a detailed examination of the company's financial statements, accounting policies, financial projections and cash flows.
- A valuation of the company: various methods can be used, such as net asset value, comparative value, yield value or production value, or value using discounted cash flow. Each of these methods offers different points of view that are important to consider
- A legal audit: encompasses the review of all major contracts, licensing agreements, incorporation documents and corporate records. It is essential to pay attention to any pending or potential litigation as well as compliance with applicable Luxembourg and international laws and regulations.
- An operational assessment: this includes an analysis of the business processes, the operational efficiency, the technology used and the supply chain.
- A human resources analysis: this examines the organizational structure, labor contracts, compensation policies and benefit plans.
- An assessment of risks and potential liabilities: this is a cross-cutting aspect that encompasses all areas of due diligence. This includes the identification of environmental, regulatory, market and operational risks that could affect the value or viability of the transaction.
Negotiation, financing and transaction closing
Once due diligence has been completed, it is time to proceed with negotiation, securing financing, integration planning, closing the transaction and implementing the planned integration. Below we will briefly outline each of these steps:
- Negotiation and documentation: at this stage the two parties negotiate the final terms of the transaction which includes the purchase price, payment terms and any warranties or indemnities. Legal documents such as the purchase agreement are then drafted detailing all agreed terms and the obligations of each party.
- Obtaining approvals: In some cases, certain approvals must be obtained prior to closing the transaction. This may include internal approvals from the buyer's and seller's board of directors or shareholders as well as regulatory approvals.
- Financing: this step involves securing the necessary funds to complete the acquisition and may include a combination of equity, bank debt or other forms of financing.
- Integration planning: prior to closing, it is important to develop a detailed plan to plan the integration of the new company's operations into the new management. This should be done whether the buyer is an individual or another company, although in each case the approach and scale is different.
- Closing of the transaction: Closing is the moment when all final documents are executed and the agreed price is paid. The shares or assets are formally transferred to the buyer.
- Post-closing procedures: after closing, various administrative and legal activities are carried out to formalize the transaction. This includes registering the transfer with the Trade and Companies Register (RCS) in Luxembourg, notifying the tax authorities and updating the company's internal records.
- Implementation of the integration plan: Finally, the last step is to carry out the implementation of the integration plan previously developed.
