One of the first steps after you have decided to sell your business is of course to find a willing and able buyer. Depending on the nature of the industry and the health of the economy, this can be a notoriously difficult exercise. But let us assume that you have found a potential buyer. What often follows entail lengthy negotiations between the seller and the potential buyer, lawyers become involved, and the buyer usually will demand a due diligence investigation into the financial-, legal-, and other affairs of the target business before agreeing to buy it. The question is, are you in a position to allow such a due diligence to the satisfaction of the interested party?
The due diligence investigation:
A person who is serious about buying your business will want to know what it is letting itself into. Whether or not your business is ready for sale will most likely be disclosed during the course of the due diligence investigation by the buyer and its advisors.
Think of your accounting records, your tax affairs, and legal compliance. Think of your employees, contracts with customers and suppliers, and many more matters, which may be specific to your business and the industry within which it operates. Preferably, these must all be in order, otherwise you run the risk of losing the deal with the buyer.
Specific items:
So, what does it mean to have the abovementioned affairs in order? Here are some very basic pointers and specific items to bear in mind:
- Accounting records: all the transactions that your business entered into must be captured in your accounting journals and ledgers. Based on the aforesaid, financial statements must be prepared for each financial year and, depending on your public interest score, it must be audited or independently reviewed. It will be extremely difficult for a buyer to know what your business is worth if the accounting records are not valid, complete and accurate. In fact, it will be impossible for you to know what an acceptable selling price is if your accounting records are not up to date.
- Valuation: Preferably, you need to procure a valuation by an independent expert to bolster your understanding of the value of your business for purposes of the negotiations with the buyer.
- Tax affairs: There is a difference between merely acquiring a business from another person or entity and acquiring the entity itself. It is the person or entity that owns the business that is liable for the income tax charged on its taxable income. So, if a buyer acquires a business, the tax non-compliance of the seller may not be a big issue. However, if a buyer acquires the shares in your company, it will want to know that you timeously submitted all your tax returns and paid your taxes to SARS, failing which penalties and interest may be charged.
- Employees: Proper record of the identities and packages of all the staff members employed in your business must be kept. Section 197 of the Labour Relations Act No. 66 of 1995 in essence requires that where a business is sold, the new employer (the buyer) must take over the employees of the old employer (the seller) on not less favourable terms of employment. A buyer will therefore want to know what its obligations will be in relation to such employees after acquiring the business.
- Contracts: Your business will likely have contracts with customers, suppliers, service providers, and/or landlords. These contracts must be perused to ensure that it can be assigned to the buyer. Some contracts may provide for the termination thereof in the event of a change of control of the business. A buyer will want to know whether such clauses exist and whether such contracts can, nonetheless, be assigned to it or whether new contracts can be negotiated and entered into with the other contracting party.
- Legal compliance: Is your business FICA compliant? Does it comply with its obligations under POPI? If the buyer takes over your business, does it take on new obligations from a compliance perspective?
A buyer will often require warranties from you as the seller that the above matters are in order. A breach of such a warranty can result in the cancellation of the sale or it may result in a claim for damages against you. It is therefore of paramount importance that you ensure that you know your business through and through before selling it, that you disclose any potential issues down the line, and protect yourself in the agreement of sale.
For a detailed assessment of what you need to know when selling your business, please contact your legal and tax advisors.