How should I structure my business buyout?
Buying a business can be a complex affair with many choices to be be made. You’ve done your due diligence and made up your mind regarding purchasing the business. The question however is in what manner will you do this? What options do you have? We’ll assume that you are buying a business that is currently operated in a Company/CC.
1)Buying the shares of the Company
From a practical point of view:
In this case you will be paying the current shareholders a sum directly and the shares in the company will be transferred to you. This implies that the full business operations including all its assets and liabilities will stay intact as is.
This is certainly from an administrative point of view the least effort. Let’s just consider other matters of importance. Risk. The risk of undisclosed liabilities mainly. Although a company might have had an audit or review done, it will not save guard you has potential buyer from this risk. This is due to the fact that the legal entity stays in place with ALL it’s liabilities, whether you are aware of them or not. If you do opt for this option however, be sure to require a recent Tax Clearance Certificate from SARS as this will provide some assurance regarding at least the company’s tax liabilities.
From a Tax point of view:
The full purchase sum of the shares is considered the base cost for your future capital gains tax calculation. Therefore, the goodwill you pay for the company will not be considered for the reduction of any kind of taxes, until the day you sell the shares of the company. At that time it will reduce your capital gain.
2) Buying the Assets, liabilities and business operations out of a Company.
From a practical point of view: In this case you will register a new business entity or use an existing entity. This entity will buy the chosen assets from the original company. It may also where possible, transfer any debt and related contracts such as premises rental to the new entity. It will take over employees, customers and other systems as negotiated. In terms of market branding and company name, this can all be transferred of coarse with the necessary procedures.
Clearly this is a much more complicated process as every aspect of the business needs to be negotiated and with third parties in some instances. The benefit of this option is that the new owner only buys what he wants to. But more important than this is the fact that the risk of undisclosed liabilities does not exist. Do take caution however. Ensure that the assets purchased is not ceded as security for liabilities and that the company actually has the authority to sell them.
From a Tax point of view:
With this type of business take over very asset and liability is separately identified with its price (market related). It is accordingly capitalised in the accounting records of the new company who will claim the related wear and tear for tax purposes. As the assets are often included at market value and not the original book value, the new owner might get the benefit of a higher wear and tear allowance for income tax purposes.
We should note that goodwill is not tax deductible in the company in terms of the Income Tax. It will however be deductible as base cost for capital gains that arises in the case where the business operations is sold.
Making a choice as to which option is more appropriate depends largely on the business case.
Contact PPHC Global for expert advice on purchasing your future business. We’ve got this!