Selling your business might be an outcome you cannot avoid due to the current financial climate, you may make a choice to pass on the business that you have created to someone else so that you can retire or move on to the next big thing. Whatever the reasons for deciding to sell your business, there are many aspects that need to be assessed and considered when drawing up a sale of business agreement, and you’d be smart to err on the side of caution because a ‘simple deal’ can turn out to be more complicated than you ever imagined.
No two businesses are created equal and as such neither are the agreements that facilitate the buying or selling of a business. Each sale will have its own set of issues, dynamics and complications that need to be carefully thought through with regards to warranties, employees, assets, liabilities, tax implications and legalities – all of which will have a bearing on the transaction timeline and process.
Katherine Timoney, an associate at boutique commercial law firm, Gillan & Veldhuizen Inc advises that aside from the usual, standard clauses which should accompany any commercial contract, a sale of business agreement should be in writing and define exactly what is being sold. “For example, does the sale include assets and if so, what assets – is it goodwill, the business name, existing contracts etc.,” she adds.
A sale of business agreement should also:
- Ensure provision is made for the business’s premises – for example by making sure that the landlord is happy to grant a lease to the new owner if the business is going to continue operating from the same premises
- Make sure the contract provides for resolutions by each party confirming the authority of signatories if they are juristic persons like companies or close corporations or trusts rather than not private persons
- Agree when ownership, risk and benefit of the business will transfer to the new owner
- Set out the purchase price and terms for payment by the purchaser
- Provide for the seller to give the buyer access to the business once the sale is finalised e.g. handing over all keys, remotes etc.
- List the employees who will automatically be transferred to the new owner in terms of section 197 of the Labour Relations Act 66 of 1995
- Set out any warranties which are given by either party. The appropriate warranties will depend on the circumstances of each business and agreement and it would be wise to take legal advice on what warranties you should agree to or ask for before an agreement is finalised. Some examples of warranties which may be included are:
- A warranty by the seller that it is the lawful owner of the business and is entitled to sell it;
- A warranty by the seller that it has the necessary permits, authorities and permissions which are required for it to conduct its business;
- A warranty that the seller owns the assets of the business and is legally entitled to sell them to the purchaser;
- A warranty that the seller has disclosed to the purchaser all material information to the purchaser about the business prior to the sale agreement being signed.
- Include dispute resolutions mechanisms for any disagreements which may arise, ideally incorporating alternative dispute resolutions rather than immediate and expensive litigation in the courts.
If necessary, publication in terms of section 34 of the Insolvency Act will require that the sale of the business will need to be advertised and if any creditor or any other person objects to the sale of the business then the purchaser has the right to pay the creditor and reduce the purchase price accordingly. “The significance of this section is that if a section 34 notice is not published and the seller is sequestrated or liquidated within 6 months after the sale of the business, the transfer is void against the trustee of his estate – which means that the liquidator retains ownership of the business and assets and can distribute them to the seller’s creditors,” cautions Timoney.
It is important to note that this is in respect of a sale of business agreement and not the sale of shares. The distinction is that in a sale of shares agreement the business and the company that owns it are both sold, whereas in the case of a sale of business agreement it is only the business that is sold.
Katherine advises consulting with an attorney on the drawing up of business sales agreements to avoid incurring any undue risks, losses or liabilities.