Author: MacGregor Erasmus Attorneys (www.meattorneys.co.za)
Many of our clients come to see for assistance when they are buying a new business. What they don’t realise is that there are two ways to do it. Either as a going concern (asset purchase) or by buying the shares / members’ interest of the person or people that own and operate the business. This decision alone can make a difference to the level of risk and chances of success.
In addition to making the right choice on how to buy the business below are some of the top tips to avoid other common and costly errors:
1. Conduct a full financial and legal due diligence of the business venture you are interested in to identify key value issues including (amongst others):
- Financial agreements the business venture is tied in to;
- Total monthly expenses to creditors, including employees;
- Labour disputes that may still be pending or subject to further action such as reviews;
- Company solvency with verifiable financial statements
2. Speak to your tax advisor about whether the sale can be zero-rated
Buying as a going concern often permits you to zero-rate the VAT on the sale.
3. Advertise the sale in terms of the Insolvency Act
The sale must be advertised prior to the effective date to avoid creditors attacking the disposition by the sellers and trying to set it aside as void. This is something you should be checking during your due diligence regarding outstanding creditors’ claims.
4. Equipment reliant business
If the business is in manufacturing/plant or heavily reliant on equipment, you must inspect and audit all machinery and itemise each and every component that forms part of the sale and provide for an inspection prior to taking transfer. You need to also be sure the equipment is not outdated, faulty or unnecessary. The value of the equipment is part of the purchase price and you need to ensure that on transfer of the business you have working machinery to continue production.
5. Profit projections
If you are worried about the business under new management, consider agreeing a projection from the seller based on historic progress and realistic figures to form part of the agreement and if possible, stagger payment of the purchase price to accommodate any adjustments if the seller’s representation was way off the mark and you over paid. This will have to be drafted to ensure that it takes market and unforeseen circumstances into account.
6. Protecting the goodwill after the sale
A business may be successful and profitable because of the relationships that the seller/s have built up over time. The seller is receiving value from you in terms of the purchase price for you to acquire that profitability. It is imperative that you protect your acquisition by ensuring that the seller/s does not start up in competition with you and use their relationships and success to unfairly compete with you. You must put adequate and enforceable restraints of trade and confidentiality undertakings in place to protect your investment and the goodwill of the business that you are purchasing.
Please download our infographic: “Buying a Going Concern“.