Macroeconomic data arriving on the state of the German economy is far less optimistic than that projected for the Polish economy. The German economy has remained stagnant almost since the outbreak of the COVID-19 pandemic, even registering a 0.3 percent recession in 2023 compared to 2022. What is a nightmare for some may represent an opportunity for others. Periods of slowdown are a convenient time for M&A (Mergers and Acquisitions) transactions, allowing investors to acquire interesting business entities.
The economic stagnancy often casts a shadow of uncertainty over the future, but beneath that surface lie hidden potentials. At a time when many companies are focused on maintaining stability or surviving difficult times, others see an opportunity for growth through acquisitions. Stagnation can create favorable conditions for strategic investment and expansion through the acquisition of other entities. Companies that remain flexible and adaptable can benefit from lower valuations and increased availability of potential acquisition targets. Through acquisitions, companies can acquire new technologies, talent or even enter new markets. In the orbit of interest of this article is entry into the German market, precisely through the acquisition of an existing company.
In the context of “target companies” in the German market, it is worth pointing out that invariably about 95% of the German economy is based on SME companies, which are often family businesses. The concept of the “German Mittelstand” is well-known around the world. German society is one of the oldest in the world. Many business owners are looking for succession solutions, which creates opportunities for investors. The German Institute for SME Research (Institut für Mittelstandsforschung) in Bonn estimates that some 190,000 (yes, one hundred and ninety thousand) companies will face a succession problem between 2022 and 2026, often becoming the subject of M&A transactions.
Polish entrepreneurs are not inactive – year after year we observe a significant increase in the volume of transactions involving Polish investors. We expect that investment opportunities will continue to grow, and as a result of the current economic stagnation in Germany, a lot of interesting companies will appear on the M&A market.
The acquisition of a German company, a business or part thereof, is most often done through a share or asset deal. Unlike the establishment of a new entity, the acquisition of an existing company allows a dynamic entry into a new market, using existing resources, trademarks, technologies, know-how, permits and licenses, market position, employee experience, customer portfolio and the company’s “goodwill” developed over the years.
Choosing the right entity (“target”) for an acquisition is challenging, and even for smaller deals it is worthwhile to take advantage of institutions such as M&A exchanges and the support of specialized investment agencies and industry advisors. Opportunities to acquire a German business partner or competitor can arise unexpectedly.
Before deciding on an acquisition, it is crucial to conduct a thorough analysis, known as due diligence. The target entity must be thoroughly vetted from legal, tax, technical and business perspectives, thereby reducing or eliminating potential risks. Due diligence allows the value of the business to be determined and negotiations on the purchase price and other terms of the deal to begin. The entire process closes within a few weeks or months.
The due diligence time should also be used to secure financing for the transaction. In this regard, it is worth taking advantage of the offer of entities, including public ones (e.g. PFR or BGK) that have foreign investment financing in their offer.
In view of the fact that the acquisition of a business not only brings business benefits, but also involves significant legal, economic and financial risks, it is of considerable importance for the buyer to have the support of specialists in law, tax, finance and experts who know the specifics of the industry from the first phase of the transaction. This issue becomes important, because certain mistakes made at the stage of the transaction cannot be corrected once the relevant signatures are under the contract.
Dr. Dominik Wagner, LL.M., EMBA Rechtsanwalt and Partner, TIGGES Düsseldorf
Tomasz Baron, LL.M. Legal Counsel and Salary Partner, TIGGES Katowice
The article appeared in the March issue of Business HUB.