Buying a business: what the law says

2011-12-06 00:00

MANY would-be entrepreneurs buy an existing business rather than starting one. Buying a business has the advantage that one can walk into a going concern without having to pay VAT on the assets being bought, if, that is, both parties are VAT vendors and the contract is drawn up correctly.

Generally speaking, one may buy the business itself or, when applicable, the company that owns that business.

The latter option would at first blush appear the easier of the two, as there is then no transfer of the business that would require the transfer of licences, telephones, electricity connections and the like. One simply steps into the shoes of the seller and carries on.

However, this option of buying the company (and not just the business) can also bring some disadvantages: the company remains liable for existing debts, and there is also the possibility of skeletons in the cupboard such as past tax fiddles, past product liability and the like to consider.

As the new owner you will have to take responsibility for these, and the seller’s promises that he will sort out any future unpleasantness may not be kept.

Often these are potentially so serious that it is preferable to buy the business from the company, rather than buying the company itself.

If one buys a business from anyone, what are the important issues to be considered?

Two acts are relevant:

• Section 34 of the Insolvency Act provides that if a trader transfers his business, that transfer will be void against the traders’ creditors or the trustee of the seller if the seller is sequestrated, for a period of six months after the transfer — unless advertisements are published in the Government Gazette and a local Afrikaans and English newspaper advising creditors of the intended sale. This process takes about six weeks and must be completed before the takeover date.

• With regard to employees, Section 197 of the Labour Relations Act provides that when a business is transferred the new owner steps into the shoes of the seller and assumes all the previous owner’s rights and responsibilities in respect of the employees engaged in that business.

If some employees will no longer be required, be sure to consult a labour specialist before entering into the contract.

Generally speaking, when considering buying a business one should always seek both legal and financial advice before concluding the deal.

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