Selling your business offers a unique opportunity to cash in on years of efforts expended building your business. However, selling your business comes with a myriad of legal and tax complexities that can be daunting for business owners and can lead to costly mistakes if you aren’t aware of some of the common pitfalls and legislation that may impact you.
This blog post aims to provide a structured approach to navigating these complexities and highlight some of the more common legal and tax matters that need to be considered, keeping in mind that we are not tax experts or lawyers. The importance of seeking tax and legal expertise at the right time in the sale process cannot be overstated.
1. Understand the landscape and basics of the Laws that may affect you
Before diving into a sell side process, it’s crucial to have a fundamental understanding of the legal landscape. This includes knowledge about Competition law; Tax laws including VAT, Company Income Tax and Capital Gains tax; Company law, Contractual law, and Labour laws that might apply. Having this basic understanding helps identify potential areas of focus and helps communicating effectively with legal experts and making informed decisions.
2. Use the services of a transaction advisors as early as possible
The complexity of selling your business necessitates the involvement of expert advisors. Ensure you have a competent sell-side advisor that specialises in M&A and selling businesses. The advisor will know when there are legal and tax matters to be dealt with and will bring the right level of tax and legal expertise into the process at the appropriate time.
3. Be Aware of Regulatory Approvals and Compliance
Certain sale of businesses may require approval from regulatory bodies. This could include the competitions commission, the take-over regulation panel, the BBBBEE commissioner for certain BBBEE deals over a threshold, or sector-specific approvals such as PSIRA approval in the security industry. Understanding these requirements and ensuring compliance is essential to avoid legal pitfalls and delays.
4. Pay Close Attention to Contractual Agreements
The heart of a sell side M&A transaction lies in its contractual agreements, including the Letter of Intent (LOI), Sale and Purchase Agreement (SPA), and Shareholder Agreements. These documents should be drafted by legal experts, outlining the terms, conditions, warranties, and indemnities relating to the deal and the implications should be clearly understood by the buyer and seller.
5. Due Diligence versus warranties, a potential high-risk shortcut
Due diligence is a critical step for a buyer which can cause a lot of friction and can drastically slow deal progress. It involves a comprehensive review of the target company’s business, assets, liabilities, and legal obligations to ensure that the buyer knows exactly what they are buying.
Unfortunately, the buyer often uses this process to try drive down the value of the business and this can become quite a problem when the same set of facts are seen differently by the buyer and seller.
An alternative approach to doing a due diligence on every risk is for the seller to warrant items that they are confident are not a risk, which can reduce the extent of the due diligence. These warrants are set out in the contract of sale and can be used to speed up the process or break a deadlock on due diligence.
Although warrants can be used as a shortcut, beware of the dangers as it can leave a door open and erode the value of the selling price after the sale of the business, when you have lost control of your business.
6. Ensure confidentiality is maintained
Throughout the sale process ensure that confidentiality is maintained. Understand the need for confidentiality agreements, the protection they offer as well as their limitations. Information should be disclosed on a need-to-know basis at the appropriate time. Ensure that access to sensitive information is well controlled and backed up by a good legal agreement.
7. Common pitfalls and opportunities in the sell side legal landscape
Some of the more common pitfalls and opportunities that you should be aware of are set below.
S197 of the Labour Relations act is a common pitfall when buying a business as a going concern, which requires that employees are transferred on same or similar terms as they are currently employed. Buyers often try get the seller to retain, and then retrench, unwanted staff as part of the sale process. Any dismissal of staff related to the sale of a business as a going concern will automatically be viewed as an unfair dismissal with severe consequences.
Tax laws, specifically in relation to sale of assets versus sale of equity has a myriad of opportunities and pitfalls and should be carefully considered as soon as possible in the deal.
There are reportable transactions which, if not reported, can result in substantial penalties, and include Hybrid equity instruments, share buy backs linked to issue of new shares, and assessed loss companies which should be considered as early as possible when decision on the transaction structure.
There are also several tax planning opportunities, or pitfalls, to selling the assets versus selling the equity which can materially alter the buyer and sellers ultimate cash flows. The impact is determined by your specific set of circumstances and can be complicated. These factors need to be considered early in the transaction and you should be guided by your transaction advisor, as to when to get the input from an expert tax advisor.
Matters to consider are Capital gains/losses combined with Dividend Withholding taxes, transferability of assessed loses, interest deductibility for the buyer where they use debt, liabilities and the need for warranties and indemnities, allocation of the purchase price, transfer taxes if immovable property is included in the deal, rollover relief opportunities, and VAT.
The Competitions act can slow the deal down and add an extra step to the process. All intermediate mergers need to be submitted to the Competition Commission (R 600 m combined assets or combined turnover with the acquired company have more than R 100 m revenue or assets) and the commission has 40 business days to assess the deal.
In conclusion, navigating the legal complexities in M&A requires a structured approach, a basic understanding of the legal landscape, and most importantly, the involvement of a transaction advisor who will involve the legal experts and tax advisors at the appropriate time. While this guide provides an overview, it’s essential to remember that each Sale transaction is unique, and specific legal and tax advice is crucial to its success. As business owners and CEOs, being proactive, informed, and prepared can make the difference in achieving a successful business sale.
No comment yet, add your voice below!