SWITZERLAND Trends and Developments Contributed by: Marco Toni and Lara Pafumi, Loyens & Loeff
tor. The attractiveness of the country as a busi- ness location and the many new tech companies constantly emerging from the highly active start- up community are likely to be the main reasons for this strong interest in Swiss tech companies. Outlook In the first half of 2024, the Swiss TMT sector was unable to resist the global trend of declining deal activity, unlike the previous year. A number of challenges – including higher interest rates, the strength of the Swiss franc, turbulence in the financial sector and ongoing global geopolitical tensions – led to a climate of uncertainty in the markets. Despite this challenging background, Switzer- land’s resilient economy, stable political land- scape and investor-friendly regulatory framework remain conducive to M&A-activity. In addition, the ongoing trends towards innovation and digitalisation – as well as the disruptive impact of advances in AI and the associated need to transform business models – are expected to drive growth and deal activity in the Swiss TMT sector. With recession fears easing and inflation stabilising, M&A activity may gradually pick up next year. Deal Structures and Other Key Aspects in Tech M&A Earn-out clauses The adequate valuation of a target company can be challenging in technology deals, especially with regard to start-ups that have only been operating for a few years and can therefore only provide limited financial metrics. In such cases, the estimation of the target company’s perfor- mance depends to a great extent on future fore- casts. At the time the deal is closed, there is often a great degree of uncertainty regarding the development of the company and the success of
the digital technology or digital business model. This uncertainty can result in valuation gaps and different price expectations between the seller and the buyer. To tackle this uncertainty and close the gap, M&A agreements in technology deals often include earn-out clauses. The earn-out is a performance-related, variable purchase price component, which is paid in addition to a fixed base price. The performance indicators can be defined by the parties. Often financial perfor- mance indicators such as net income or oper- ating cash flow are used. This way, the earn- out depends on actually generated revenues and can thus compensate for uncertainties with regard to future returns. By using an earn-out mechanism, the seller and the buyer share opportunities as well as risks after the acquisition. Such a mechanism can be beneficial for both the seller and the buyer. From the seller’s perspective, the earn-out is a way of maximising the proceeds of the sale without having to discount the purchase price due to the buyer doubting the value of the target company. For the buyer, it can ensure a more accurate valuation of the target company and reduce uncertainty about its future. In constel- lations where the seller continues to be involved in the company beyond closing, an earn-out can further incentivise the seller to maintain and improve the performance of the business during the earn-out period. Due diligence The general scope of the due diligence to be performed in a technology M&A deal needs to be determined on a case-by-case basis. However, in addition to the typical issues such as legal, tax, economic and financial conditions, there are also issues that require special attention during
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