In a merger and acquisition (M&A) transaction—whether involving the acquisition or sale of a company—the purchase price is far from the only issue requiring close attention. In practice, the success of a deal and the avoidance of pitfalls most often depend on thorough preparation: defining the conditions, designing the structure, ensuring proper information flow, and managing risks all require careful planning. Those who navigate this stage—on either the sell-side or the buy-side—well prepared and with advisor support are far more likely to close successfully, with fewer risks and surprises. Below we summarise the typical phases of transaction preparation and the most common pitfalls.
Preparing for the transaction
You can already rely on our experts during the initial discussions aimed at assessing the parties’ intentions. With extensive know-how in M&A processes, we provide support throughout the entire preparation phase. In transactions, the following stages typically arise.
1. Designing and setting up an appropriate structure
On the sell-side, it is important to understand in advance the expected tax implications of the sale, as well as certain aspects of the seller’s residual liability after the transaction. This requires taking into account, among other things, the target company’s ownership structure; whether the seller is an individual or, for example, a holding company; verifying whether the shareholding has previously been properly reported pursuant to specific Hungarian tax legislation (where relevant); and, with long-term objectives in mind, assessing the relevance of a trust arrangement (fiduciary asset management) or a family foundation structure. If the desired outcome requires a pre-transaction restructuring (including changes in shareholding ratios among co-owners, entering into a shareholders’ agreement, or concluding tag-along/drag-along arrangements), this can typically be implemented efficiently only if it is carried out well ahead of signing.
On the buy-side, a similar question arises: where the target company, business line, or assets should sit within the corporate structure, and what is optimal from the perspective of financing, risk mitigation, future operations, a potential exit, and tax implications (especially where the buyer is part of an international group).
At this stage, it is also worth clarifying—based on all circumstances—which type of transaction is optimal, feasible and practical: a classic share deal, a business line transfer (or asset deal), or another structure. The advantages and disadvantages of each option should be reviewed (e.g., timing, financing, tax impact, liability considerations, etc.).
Although it often seems self-evident, as a first step it may be worth examining whether the intended objective is indeed best achieved through a company sale, or whether alternative solutions should be considered—on either the sell-side or the buy-side.
Tipikus buktatók:
- The seller sells the participation as an individual, triggering immediate tax consequences and leaving residual seller liability at the level of the individual.
- The seller cannot persuade the co-owners to proceed with the sale.
- Financing is provided in an unsuitable form for the buyer as a group member.
- Within the buyer group, the wrong entity becomes the owner already at the outset, even though the operation belongs elsewhere—making further restructuring necessary.
- The transaction could have been implemented more efficiently and faster using a different transaction type.
2. Investor outreach and market approach
On both sides, it is important to make a professional impression from the very first contact. On the sell-side, it is advisable to approach potential strategic and/or financial investors with a professionally prepared and presented information memorandum. In certain cases, it may also be useful to prepare a so-called tax factbook (as part of the information memorandum), presenting the company’s tax profile and making the target more attractive.
Representing the buyer, it may likewise be useful to perform a targeted preliminary review suitable for identifying potential red-flag risks to support management decision-making.
Typical pitfalls:
- Spending most of the effort negotiating with non-target counterparties, causing unnecessary time and costs.
- Failing to run a competitive process where this would realistically be possible.
- On the sell-side, the materials intended to generate transaction interest are unprofessional, suggest a lack of seriousness, or do not attract sufficient interest.
- Providing too little, too much, or inaccurate information to the potential counterparty.
- On the buy-side, red-flag risks already visible from public information reach decision-makers too late.
3. Initial negotiations
Following the initial contact, the parties typically conduct informal discussions where the prospective buyer becomes more familiar with the target and both sides outline their preliminary views on the transaction to assess whether there are any irreconcilable differences on key issues.
At this stage, it is also important to understand which issues may not yet appear significant but could become critical later—where it is worth setting detailed terms and reaching agreement already at this point.
A typical pitfall is failing to clarify a material point in advance, for example:
- It is unclear whether certain assets (certain contracts, or even privately used real estate) form part of the deal.
- Inappropriate assumptions are recorded on the buyer side.
- Expectations regarding the retention of key persons and non-compete obligations are not articulated.
- The course of negotiations leads to misunderstandings regarding pricing.
4. Confidentiality
In many cases, during informal discussions the buyer (often also a competitor) already requires more detailed information, making it necessary for the parties to enter into an appropriate confidentiality agreement. The design of confidentiality obligations and applicable sanctions often goes beyond standard NDAs. Involving legal counsel is particularly justified if personal data is disclosed, or if the market sounding could fall under the EU Market Abuse Regulation (“MAR”).
Typical pitfalls:
- Disclosing non-aggregated data.
- Inadequate protection of know-how.
- Excessive disclosure of sensitive market information (pricing, wages).
- Providing data in an inappropriate format or with insufficient content.
- Breaching competition law rules through information exchange.
- Breaching confidentiality obligations arising from other agreements when disclosing data.
- Defining too broad a circle of persons involved in transaction preparation.
- Failing to agree sanctions for breach of confidentiality that are sufficiently dissuasive.
5. Letters of intent
After informal discussions and the exchange of basic information, the buyer typically provides a statement with limited legally binding effect (letter of intent, memorandum of understanding, term sheet). Its purpose is to confirm the acquisition intention in writing and record the key terms of the contemplated transaction. It is strongly recommended to involve a lawyer in drafting the letter of intent and, on the sell-side, in accepting it (even with amendments), as it is advisable to address a number of issues, such as: governing law (the foreign party’s law or Hungarian law), dispute resolution forum (courts or arbitration), exclusivity (and its duration) regarding negotiations, confidentiality provisions, potentially non-solicitation, which clauses are legally binding, etc.
Typical pitfalls:
- The letter of intent may qualify as a preliminary contract, creating an obligation to enter into the final agreement.
- The letter of intent contains no legally binding elements at all (e.g., governing law).
- From the buyer’s perspective, it may be disadvantageous if the letter of intent does not include exclusivity.
- Pricing mechanism is not sufficiently clear.
- The planned timeline, payment terms (e.g., earn-out) and financing needs are not defined realistically.
The next steps of the process are not clear based on the letter of intent
6. Preliminary review of required approvals and transaction constraints
At the time of signing the letter of intent, it is also worth assessing whether agreements with third parties—such as a financing bank—or state aid/grant conditions affecting the target contain change of control provisions (i.e., whether the third party has stipulated that its consent is required for a change in ownership). Where possible, preliminary consent should be obtained from such third parties.
It may also be necessary to consider whether the transaction would result in the loss of the target’s SME (micro, small or medium-sized enterprise) status.
To develop the contractual conditions and timeline, legal experts should also review whether any permits/approvals are required, in particular whether the transaction constitutes a concentration that may trigger proceedings by the Hungarian Competition Authority (GVH).
If the buyer is a foreign (non-Hungarian) investor, the transaction should be assessed under the Hungarian FDI regime to determine whether ministerial approval or acknowledgement is required. While similar regimes exist abroad, Hungarian rules require notification across a very broad range of transactions—even in the case of EU investors. Beyond the two-tier FDI regime, sector-specific restrictions may apply in certain industries (financial sector, agriculture, healthcare, energy).
Typical pitfalls:
- The parties fail to assess whether regulatory approval is required and complete the transaction without it, which may lead to significant fines and invalidity.
- The parties do not account for the actual time needed to obtain approvals/consents from authorities and third parties, and do not initiate these processes in advance.
- The parties do not consider the transaction’s potential impact on the target’s SME status.
- EU-established investors assume that foreign-investor screening does not apply to them.
7. Due diligence
After the above steps, a comprehensive legal, tax and financial due diligence process usually begins. This is when risks embedded in the target can be identified. The seller can facilitate the process through preparation, for example by compiling a data room in advance—typically with advisor support—and collecting likely answers and disclosures.
On the sell-side, it is extremely useful to have expert support in understanding what a strategic or financial investor will focus on, and when and how certain confidential information should be disclosed.
Experts can also help remedy findings identified during due diligence and fulfil closing conditions, and on the buy-side assist in setting closing conditions and designing an appropriate liability and indemnity framework for identified risks.
Typical pitfalls:
- The scope of due diligence does not cover the potential risks.
- Due diligence drags on due to inadequate data provision or incomplete, unstructured documentation.
- The SPA does not adequately reflect due diligence findings; the contractual liability regime does not fully address identified risks.
- A wider circle of the target’s employees becomes aware of the transaction.
- Tax, finance and legal workstreams do not collaborate effectively.
- Due diligence results are not translated into “business language.”
8. Preparing the sale and purchase agreement
To develop the detailed transaction terms, it is essential to involve a lawyer experienced in M&A matters.
Finalising the purchase price determination mechanism and payment terms, representations and warranties, security package (W&I insurance, escrow, etc.), and liability provisions may require negotiations lasting several months up to signing. The share purchase agreement (SPA) should be prepared not only from a legal perspective but also with financial and tax expert involvement, as it will form the basis for managing, for example, post-transaction tax-related claims.
Typical pitfalls:
- On the buy-side, risks identified during due diligence are not made closing conditions, or are not factored into pricing.
- Representations and warranties and the indemnity regime do not address the risks.
- Purchase price adjustment provisions are not sufficiently precise and unambiguous.
- On the sell-side, liability is not limited; the concept of “fair disclosure” is not properly defined.
- The SPA does not meet external financing conditions.
- Provisions on ordinary course of business and prohibited actions between signing and closing are inadequate.
- Post-closing obligations (including the seller’s non-compete) do not support successful implementation/integration.
- The buyer fails to report the acquired shareholding interest; a corporate buyer does not act as a withholding agent in relation to an individual seller and does not withhold the required taxes/contributions when paying the purchase price.
Why is it advisable to involve an expert as early as possible?
If an advisor joins only at the due diligence or contract preparation stage, they often have to work with what is already “on the table”. In such cases, it is much harder to achieve changes that would be optimal for the client. Therefore, it is advisable to discuss—already when the transaction intention arises—which points may be critical and what to watch out for as a seller or buyer.
