Koos Benadie | Director & Commercial Attorney
Selling a small or medium business is a complex venture that will involve several legal considerations. It is always a good idea to enlist an attorney, experienced in the sale and disposal of businesses, before you proceed. Whether or not you profit will depend on the reason for the sale, the timing, the strength of your operation, and the business structure.
Below, we have highlighted important legal elements to consider when you eventually decide to sell, but there will be number of other important terms which should be dealt with, including intellectual property, sales commissions, and litigation processes should the need arise. An experienced commercial attorney should be able to identity all further important aspects that are specific to the transaction that must be dealt with in the sale agreement.
- Selling the business or selling the entity
Ordinarily, you have a choice between selling the entity which conducts the business (i.e. the shares of the company) or selling the business itself, while retaining ownership of the entity.
The option you choose will depend on factors such as the type of entity being used for the business, the existing financial structure of the business, the tax implications of a sale and the result, financial or otherwise, that you’d like to achieve by selling the business.
For instance, a sale of the business instead of a sale of the entity may be preferable in cases where the transfer duty of 1% payable on the transfer of shares is prohibitively expensive; where there is any doubt about the history of the entity and its potential liabilities; where only a part and not the whole of the business conducted by the entity is to be sold; or where the entity disposing of the business is a partnership or sole proprietor – as these entities cannot be sold. It might also make sense for the seller to dispose of the business but retain the entity for the purposes of exploiting the benefit of an assessed tax loss.
- Price and Payment Terms
It is valuable to calculate the purchase price with reference to the value, at the date of sale, of the stock on hand (as determined by a physical stock take), the book value of debtors as determined by an audit), the depreciated book value of fixed assets, the value of any other assets such as shares, loans, cash etc. and the balance for goodwill or other intangibles.
You should specify by whom, when and where payment should take place and payment of the purchase price should be guaranteed in the form acceptable to yourself. Unless guarantees are furnished, ownership of the business should remain with you until full payment of the purchase price. Where appropriate, interest should be requested at the most competitive rate.
- Stock Taking
To determine the value and extent of the stock, it is important for a physical stocktaking to be conducted jointly between the buyer and yourself at close of business – on the day before the effective date of the transaction. Some factors should be considered, including whether the stock should be valued at the higher of cost price or market value; whether allowance should be made for damaged, unsaleable, or obsolete stock; and whether the buyer should warrant that he was not induced to entering into the sale by any representation with regard to the condition of the stock.
- Conditional Contract
In a sale of business, it will be valuable if you are released from certain obligations or that you succeed in concluding certain additional agreements. The entire agreement is usually made subject to such conditions being met because the commercial success and feasibility of the sale is dependent on these uncertain future events. Some typical conditions precedent are:
If the premises are leased the consent of the landlord, or a cession or assignment of the lease to the purchaser must be obtained;
The seller being released from any sureties and guarantees given by the seller to third parties in respect of the business, its performance or the quality of its products;
The seller obtaining the consent, where appropriate, of third parties to the sale of the business.
It is important to fix a date by which the conditions must be fulfilled. If not fulfilled, the sale should lapse and both parties should be released from the agreement.
- Date Arrangements
Some important dates which must be agreed to and clearly defined are the following:
Signature date – the date when the last party signs the agreement;
Effective date – the date when the agreement takes effect (which can be different from the signature date);
Condition fulfilment date(s) – the date(s) when the specified conditions precedent, which suspend the sale, are to be complied with;
Closing date – the date when ownership of risk in and the right to profit from the business passes to the buyer. This can also be the date when the formalities necessary to transfer the business to the buyer are complied with;
Final date – the date when the warranties given by yourself, as the seller, will lapse.
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