Key considerations for buyers

Acquiring a private K-12 institution in Hungary requires careful planning and due diligence. Here are the essentials:

• Ownership Structures: The majority of private K-12 institutions located in Hungary are owned and operated through non-profit entities, including foundations and non-profit LLCs. Most private K-12 institutions chose this ownership structure for various tax purposes and to be eligible to certain government incentives. Non-profit structure is not mandatory; there are some K-12 institutions, which are owned and operated by for-profit entities.
• Transaction Structure: Hungarian laws and regulations applicable to non-profit entities significantly limit the transfer of their assets and the distribution of the proceeds from such sales. Consequently, structuring the transaction as an asset sale is not always a feasible option and, even when it is, it may lead to a more complex structure than a share deal. On the other hand, acquiring ownership rights in the non-profit itself can also present challenges and may not be optimal for for-profit-oriented buyers for two main reasons: (i) such ownership rights generally provide far less control than those in for-profit entities and (ii) certain types of non-profit entities (e.g. foundations) cannot be transformed into for-profit entities, which prevents or complicates any post-closing restructuring into a for-profit structure (e.g. for profit extraction purposes). A for-profit oriented pre-sale restructuring of the target and/or the seller may offer a solution to the above concerns.
• Regulatory Considerations: Hungary maintains a strict licensing regime for private K-12 institutions, which is overseen by the Minister responsible for public education. If the beneficiary of the operator's rights of the K-12 institution would change as a result of the transaction (typically in case of asset deals), the transaction requires the Minister's prior approval. Also, depending on the scope of activities of the target, Hungarian FDI clearance may also be required.

Strategic takeaways

• Potential buyers are strongly recommended to conduct a comprehensive due diligence on the target to understand its ownership and profit extraction structure and the legal and tax risks associated with it.
• As sellers are often private individuals or entities with limited financial resources, parties should consider W&I insurance. In such cases, the due diligence scope must be aligned with the desired coverage.
• When structuring the transaction, special attention should be given to regulatory approvals (including the consent of the Minister and FDI clearance), as well as to restrictions on the selling non-profit entity's right to sell assets (such as the operator's rights regarding the K-12 institution) and to distribute the proceeds from the purchase price.
• Post-closing profit extraction, including consolidation of the target, should be addressed as a key element during the planning phase given the statutory limitations applicable to Hungarian non-profit entities.