Sale of a Business – Some Pointers

Every business came from somewhere. Perhaps your business was born amidst greasy carburetors and worn out spark plugs in a dark and dusty corner of your garage. Mayhaps the seed germinated at what was once the dining room table which soon morphed into a make-shift desk, home to cables, computers and copies of DIY business guides while the kids were relegated to balancing supper on their laps in front of the TV. No matter why, where or when conception began, few feelings match the adrenaline, excitement, anticipation, fear and hope experienced by its creator. Given the dismal mortality rate of newborn businesses, the pride and indeed euphoria when your offspring succeeds in life is almost incomparable. As time progresses, this fledgling business will hopefully survive teething, growth spurts and the occasional tumble, and finally allow its creator the luxury of sleep-filled nights. Assuming the creator doesn’t give in to the temptation to kill it off in its teenage years, during which its pace of growth, willful resistance and impulsive experimentation often strains the creator’s wallet and sanity, this once fledgling business will (hopefully) emerge a strong, competent, successful and profitable enterprise, able to hold its own in the big bad world.

At some stage during the life of your business, you may find yourself contemplating selling off part or the whole of your enterprise. There could be any number of reasons for selling your business: a desire to try your hand at something new, changes in your personal situation, or an offer you simply can’t refuse. And after some consideration you decide to allow your brainchild to fly the coop. You’ve calculated the purchase price, negotiated a few conditions and agreed on the effective date, but what then? There are many who would simply instruct their accountants to file the relevant transfer documents, pocket the cash and saunter off into the sunset whistling a happy tune. But there are a few other things that the seller should be aware of, lest he finds himself whistling a different tune.

1. Written Agreement:

Do you have a written sale of business agreement in place to record the sale? A formal sale agreement constitutes an important document that should contain the pertinent terms and conditions governing the sale, and very importantly, set out the purchase price and method of payment.

2. Suretyships:

Have you signed any personal suretyships for the business? With the bank for an overdraft facility? With the landlord for the business lease? With a supplier to get credit? If so, you would be well-advised to make arrangements to terminate the suretyship. Often this can only be done if the buyer is willing to sign a personal suretyship in your stead, and if the creditor is happy with the buyer’s creditworthiness. Failure to cancel a suretyship could mean a nasty surprise later if the creditor decides to come after you to pay the debts of a business you thought you no longer had anything to do with!

3. Section 34 notice:

Have you published a notice in terms of Section 34 of the Insolvency Act? Section 34 states that:

“If a trader transfers in terms of a contract any business belonging to him, or the goodwill of such business, or any goods or property forming part thereof (except in the ordinary course of that business or for securing the payment of a debt), and such trader has not published a notice of such intended transfer in the Gazette and in two issues of an Afrikaans and two issues of an English newspaper, circulating in the district in which that business is carried on, within a period not less than 30 days and not more than 60 days before the date of such transfer, the said transfer shall be void as against his creditors for a period of six months after such transfer, and shall be void against the trustee of his estate, if his estate is sequestrated at any time within the said period.”

Thus if a seller transfers his business without advertising the sale in compliance with section 34, the transfer will be void, or invalid, in respect of his creditors for six months after the transfer. The object of this section is to protect the creditors against an owner selling the business and failing to pay any debts owing. The section 34 notice is intended to allow the creditors sufficient time to allow them to stake their claims before the business is transferred.

4. Employees:

If you are selling your business as a going concern and the business employs staff, what is to become of the staff upon transfer of the business? In particular, have you considered section 197 of the Labour Relations Act? This section provides that where a business is transferred to a new employer, the new employer is automatically substituted in the place of the old employer in respect of all contracts of employment in existence immediately prior to the transfer. This section therefore affords employees protection in the event of a sale of the business. What is important is for there to be: consultation with the affected employees; clarity as to which employees are being transferred to the purchaser’s employment and how remuneration, leave and other benefits are to be dealt with; and generally a clear-cut and streamlined changeover process.

5. Notifications and Cessions:

Have your creditors, suppliers, customers, business associates and other interested parties been notified of the sale? In some instances agreements with business associates provide that written notification, and sometimes even the business associate’s consent, is required before beneficial control in the business can be transferred. Failure to notify interested parties could unwittingly jeopardise key contracts. And where applicable, have you provided for the cession and assignment of affected agreements? Again, pay careful attention to which contracts require prior consent before cession may be effected.

There are a number of other considerations when selling your business: fair market valuations, payment terms, warranties, confidentiality and restraints, which should also be considered in the sale process. Seller and purchaser alike would be well-cautioned to carefully negotiate and record all the terms of the sale agreement to avoid nasty surprises later.

In Summary: When selling your business, make sure that you have protected yourself against future claims by cancelling suretyships and publishing a section 34 notice. Ensure that you have recorded the sale of business agreement in writing, protecting your rights in the event of any default. And make sure that employees, suppliers, creditors, customers and business associates are all considered in the process.

Please note that this information is supplied for general information and does not constitute legal advice. It is advisable for you to contact a legal practitioner for guidance in respect of your unique requirements.