Transfer premium: Overview, definition, and example
What is transfer premium?
A transfer premium refers to the additional amount of money that a buyer is willing to pay to acquire an asset, such as a company, property, or investment, over its current market value. It often occurs in situations where the buyer believes that the asset has unique value, potential for growth, or strategic advantages that justify paying more than the asset's book or market price. The transfer premium can also reflect factors such as the scarcity of the asset, synergies with the buyer's existing business, or the desire to control or gain access to a valuable resource.
For example, when a company is being acquired, the buyer may offer a transfer premium over the company’s current market share price to entice shareholders to sell their shares.
Why is transfer premium important?
The transfer premium is important because it reflects the perceived value of an asset beyond its basic market price. It plays a key role in negotiations, especially in mergers, acquisitions, or investments, where the buyer is looking to obtain something more than just the asset’s face value. By paying a transfer premium, buyers can gain strategic advantages, such as entering a new market, acquiring intellectual property, or eliminating competition.
For businesses and investors, understanding the concept of transfer premium is essential when making decisions about whether to buy, sell, or acquire assets. For sellers, it can provide an opportunity to receive more for their assets than what the market price would suggest.
Understanding transfer premium through an example
Imagine a company, Company A, is acquiring Company B, which is a smaller competitor. Company A believes that acquiring Company B will give them access to valuable patents and expand their market share. The current market value of Company B’s shares is $50 per share. However, Company A offers $60 per share, paying a $10 transfer premium. This premium reflects the added value Company A believes they will gain through the acquisition, such as synergies, increased market share, and access to new technology.
In another example, an investor might pay a transfer premium when purchasing a property that is in a prime location. The property is worth $1 million in the current market, but the investor is willing to pay $1.2 million because they believe the location will increase in value over time.
Example of transfer premium clause
Here’s how a transfer premium clause might look in an acquisition agreement:
“The Buyer agrees to pay a transfer premium of 15% over the current market price of the Target Company’s shares, in recognition of the strategic value and synergies expected from the acquisition.”
Conclusion
A transfer premium is the extra amount a buyer is willing to pay above the market value for an asset, reflecting the perceived additional value or strategic advantage gained from the acquisition. It plays an important role in business transactions, such as mergers, acquisitions, and investments, by reflecting the buyer’s belief that the asset is worth more than its current market price. For sellers, understanding the transfer premium can provide an opportunity to maximize the value received for their assets.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.