Financial Data
Updated 18 Oct 2019


Vital legal factors you must consider when selling your business

Selling your business? Do you know what you are selling? The business, assets or shares? There are a variety of factors to consider when deciding what to sell and how to structure the transaction. 


Shelley Mackay-Davidson, 28 October 2016  Share  0 comments  Print


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This is the second article in the series and I will be discussing what it is that you are selling – a business, shares or assets. For the purposes of this discussion I’ll assume that your business is owned by a company.

What are you selling?

We talk very loosely of ‘selling a business’, but what exactly does this mean? Your company operates a business and this business is itself made up of a number of aspects – for example, fixed assets, liabilities, people (employees, directors, customers, financiers), trading names, stock, contractual rights and obligations and intellectual property rights. Your company owns the business, including all the aspects which make up your business.

If you intend to sell your business ‘lock, stock and barrel’, this means that you will generally sell the entire business, and all aspects comprising that business, as a going concern i.e. as a stand-alone operation.

If you only intend to sell some aspects, like the fixed assets, that will be an asset sale and not the sale of the whole business. A company may own more than one business and decide to dispose of only one of those businesses. For present purposes, we assume that you wish to sell the whole business.

Related: Practical legal insights 101 for selling your business

In its simplest form, there are two ways in which to achieve this – (i) either by selling the business (and all aspects which comprise the business) from the company, as seller, to a third party as purchaser (a business sale agreement).

Or, (ii) by selling all or a part of the shareholding in the company from the shareholders, as sellers, to a third party, as purchaser (a share sale agreement).

These are entirely different types of transaction, although they achieve the same result – the purchaser will effectively acquire ownership and control the business, either directly, by buying the business out of the selling company, or indirectly, by purchasing the shares in the company and thereby taking ownership of the company that owns the business.

What factors should you consider?

What -to -consider -when -selling -a -business

When deciding whether to sell via a business sale or a share sale, a number of factors must be considered, all of which will influence the route and structure you decide to implement. Some factors (and by no means a conclusive list) include:

Tax effects

You will need to consult with your accountant, looking carefully at what taxes will be triggered by the transaction. Capital gains tax and/or dividends withholding tax could have a significant impact on the net proceeds you receive from the sale, as either or both may be payable.

If you are selling the business as a going concern, and the company is a VAT vendor, VAT may be payable either at the prevailing VAT rate of 14%, or if both the seller company and the purchaser are VAT vendors, the transaction may be zero rated, in which case VAT is charged, but at 0%.

Material Contracts

Consider, carefully, the terms and conditions of agreements with third parties, like suppliers, distributors and landlords. Often these will contain provisions prohibiting the conclusion of any transaction where there is a so-called ‘change in control’. A sale of shares will mean that there is a change of control in your company with whom the third party has contracted, therefore requiring the consent of the third party.

If selling the business, you will need to be sure that the third party will be prepared to transfer the relevant agreements from your company to the new buyer. Any astute purchaser will insist that you obtain this consent, or transfer, as a pre-requisite to the sale being concluded.

Employees

Whether you are selling the business or shareholding, remember that the rights of the company’s employees remain intact. In terms of S197 of the Labour Relations Act, if a business is sold, all the employees are automatically transferred to the purchaser, on exactly the same terms and conditions, and their employment with the purchaser is deemed to have commenced on the date that their employment commenced with the company.

You are cautioned against any agreement which obliges you to reduce the company’s workforce before, or as a consequence of the sale, or which is structured in the guise of an asset sale, to avoid S197 (unfair labour practice disputes). 

Related: Starting your own business in 23 proven steps

Warranties

A warranty is a guarantee or statement made by the seller and/or the company that certain facts are true and correct. If a warranty is given, but later proves to be untrue or incorrect, and as a result the purchaser suffers damages, then the purchaser will have a claim against the seller and/or the company for the damages suffered.

Although a due diligence may be done by the purchaser, a purchaser relies on the seller for information relating to the business and company. A share sale poses the greatest risk for a purchaser, especially if the company has been trading for some time. This is because the purchaser is not simply buying certain defined assets and/or liabilities from you. The purchaser will be stepping into the shoes of your company completely, and potentially being exposed to historical liabilities of your company. In this case the warranties that are required may be extensive and onerous – as seller you are required to have in depth knowledge of the company’s’ affairs.

A business sale will usually require less stringent warranties, as most of the business risk will remain with the company and not be transferred to the buyer.

In my next article in this series, I will discuss whether you are entitled to sell - what restrictions there may be in your Company’s MOI, shareholders agreement and/or the Companies Act, which need to be considered, and possibly overcome.

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About the author


Shelley Mackay-Davidson

Shelley Mackay-Davidson is a partner at Brevity Law, a niche law firm based in Cape Town.

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