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.
In the previous issue we highlighted 5 important legal elements to consider when you eventually decide to sell. Here, then, are another 6 critical considerations.
A sale of business is often associated with the sale of the debts of the business, which can be a valuable asset. By acquiring the debtors the buyer has an easy entry to the client base of the business. To minimise risk you can insist that the buyer take over all the debtors ‘voetstoots’ and undertake to take all necessary and reasonable steps to collect the book debts. You should also resist giving any warranties in respect of the debtors.
Seven. Insolvency Notices
In terms of Section 34 of the Insolvency Act the seller must publish a notice advertising the sale of the business in accordance with certain specifications. The timing of the publication of the notice is critical, as by the effective date of the sale, a period of between 30 and 60 days must have lapsed since the publication. If the notice is not published, any creditors of the business having an unsatisfied claim can avoid the transaction within 6 months. It is therefore of crucial importance that you either publish the Section 34 notice or guarantee to pay all creditors of the business by the effective date, in which case the publication will not be necessary.
Warranties given by the seller are invariably a crucial part of any sale of business and should be considered with great care to ensure that you are not unnecessarily exposed or find yourself being in breach of the agreement from the outset.
If possible, warranties should be given ‘subject to the seller’s best endeavours’ to protect you against unforeseen circumstances. You should also be cautious of giving warranties which could leave you liable for consequential or other damages. Generally speaking, assets should be sold “voetstoots” and profit or turnover should not be guaranteed. It is also recommended that the agreement state that no warranties or guarantees were given other than those contained in the agreement, and that (where appropriate) the buyer had been given sufficient and unrestricted opportunity to investigate the affairs of the business and to satisfy himself regarding its scope, value and condition.
It is common practice for a buyer of a business to insist that the seller agrees to a restraint of trade to restrict the seller from soliciting existing customers of the business or to directly or indirectly operate a similar business in close proximity to the business for a set period of time. The purpose of a restraint of trade is to create a period of reprieve within which the buyer can establish a rapport with business’ customers and exploit the goodwill and customer connections of the business which he has purchased without (unlawful) competition from the seller.
Should this be agreed upon, you can endeavour to limit the restraint to a specific area, period and commodity or activity, and to negotiate a consideration to be paid in respect of the restraint.
An important aspect of selling a business is the effect the transaction has on the employees of the business. Where we are dealing with a sale of the shares in the company which operated the business, the employees who are employed by the company continue to be employed by the company. If the business itself is sold, the position is that the employees were employed by the seller and remains in the employ of the seller unless agreed with the employees to the contrary. It is advisable for the seller to obtain the purchaser’s consent to taking over all employees on existing service terms and the seller should make provision for leave pay bonus and retrenchment payments which will remain the obligation of the seller up to the effective date. Careful consideration should also be given to the effect of the sale on any existing pension fund.
When disposing of a business, it is normally not done by selling the assets comprising the business, but by selling the business as a going concern. Merely selling assets would attract VAT at the applicable rate. Selling a business as a going concern on the other hand can be structured in such a way that the transaction, from a VAT point of view, would be zero-rated. Important to note is that it is not an exemption from VAT, but applying VAT at a zero rate.
To merely state in the agreement of sale that the business is sold “as a going concern” is not sufficient. The key to the correct structuring of the agreement lies in the provisions of section 11 of the Value Added Tax Act, No 89 of 1991 (the “VAT Act”) and in particular section 11(1)(e) thereof which has the following requirements that have to be met:
- The seller and the purchaser must both be registered as VAT vendors as defined in the VAT Act;
- The supply (subject of the sale) must consist of an enterprise or part of an enterprise which is capable of separate operation;
- The parties must state specifically in their agreement of sale that the supply is a going concern;
- The parties must agree in their written agreement of sale that the enterprise will be an income earning activity on the effective date, being the date of transfer or take-over of the business;
- All the assets necessary for carrying on the enterprise, must be disposed of to the purchaser; and
- The parties must state in the agreement of sale that the consideration for the supply (the purchase price) includes VAT at a zero rate.
It would be prudent to ensure that a specific clause, containing all the above requirements, be included in an agreement of sale of any going concern in order to bring the transaction within the realm of a zero rated transaction.
RMI4law members enjoy the benefit of legal advice from an attorney 24 hours a day. If you wish to join RMI4law, call 0861 668 677.
Legalex (Pty) Ltd, registration number 2003/003715/07, is an authorized Financial Services Provider (FSP 5277) and underwritten by Guardrisk Insurance Company Limited (FSP 26/10/75)