Seller and buyer beware! Advice for buying and selling a business
When buying or selling a business, both buyer and seller need to take into account a range of accounting and tax considerations. Faith Ngwenya, Technical and Standards Executive at the South African Institute of Professional Accountants (SAIPA) advises both buyer and seller to take sound professional advice. “There are just so many variables to consider and weigh up,” she says. “Somebody with experience in this type of transaction will be very helpful.”
Both parties have to consider what the business as a whole, and/or the shares up for sale, are worth, and the impact that the purchase or sale would make on their current financial position and future estate. These will likely affect how attractive the deal is and how it will be structured.
One of the trickiest parts of any transaction is establishing the value of the business to be sold. It’s really the responsibility of the seller to ensure that the valuation is properly done because it is he or she who will have to convince the Receiver of Revenue that the valuation is fair for the purposes of capital gains tax.
A valuation offers the seller and buyer the comfort of an objective view of what the business is worth, including its immovable property, without having to rely solely on the financial statements. It also provides the buyer with a better basis for assessing the business’s financial outlook.
Another very important part of the sales process is due diligence. This comprehensive evaluation of every aspect of the business usually takes place only once negotiations are fairly advanced, and its aim is to minimise the risks of the transaction. Due diligence is the buyer’s chance to confirm the information provided by the seller.
“When it comes to the due diligence, I always advise people to look out for the four Vs: verification, validation, viability assessment and valuation computation,” Ngwenya says. “This covers verifying that the seller actually owns what she is selling, detecting and assessing risk, looking at how to minimise that risk (and maximise returns), and then pulling everything together into a valuation that balances risk and potential return.”
Solvency and liquidity
Then there’s the balance sheet. Ngwenya says that in terms of the new Companies Act, it’s mandatory that the company’s ability to continue as a going concern is established. The test for this is solvency and liquidity. This test will measure its ability to continue operating within its current banking and financial facilities, and its net cash flows to ensure they are in line with projections. Aside from these financial considerations, a going concern must have the facilities, equipment, business processes and staff in place to remain operational for at least the next 12 months.
The going concern rule is also supported by King III.
Macro environment considerations
Ngwenya points out that there are other non-financial considerations to bear in mind. These would include possible litigation, rezoning that could affect profitability, the calibre of existing staff members, whether the property is owned or leased, and whether the seller has another, similar business in the area.
Finally, Ngwenya says that the tax situation of the company must be carefully assessed. This involves a consideration of capital gains, value added, income and dividend withholding taxes.
“Selling or buying a business can be the reward for years of hard work, and the beginning of a new stage in one’s life,” Ngwenya concludes. “It’s a complex process that can become emotional, which is why I think an objective professional accountant can be invaluable.”