Sales of going concerns Part II

Sales of going concerns Part II

In the previous article we looked at the requirements to structure a sale as the sale of a going concern for purposes of Value Added Tax.  In this article, we will highlight other aspects that sellers and purchasers need to keep in mind when selling a farm as a going concern.

Authority: -

If the sale is between two individuals, there is no requirement to establish either the seller’s or purchaser’s authority to transact.  However, most farming enterprises are held either in companies, close corporations or trusts.  In such a case, it is important to ensure that the representatives of a party are properly authorized to conclude the transactions.  The following aspects need to be noted: -

• In the case of companies, the sale of the main business or the bulk of the assets require a special resolution of shareholders.  In most cases this will be 75% of the shareholders.
• Sales of Immovable property by a close corporation require the written consent of 75% of the members.  In the case of close corporations, the purchase of immovable property also requires the written consent of 75% of the members.
• In the case of trusts, the trustees of the trust must act jointly, either by signing the sale agreement or, alternatively, authorizing one of them to sign the sale agreement.

Due Diligence Investigations: -

In most cases the Purchaser will require a due diligence investigation to determine the viability of the business that it will be buying.  These clauses must be worded very carefully to ensure that the parties co-operate with each other and that all relevant information is disclosed to the purchaser.  In our view, the purchaser should sign a confidentiality and non-disclosure agreement prior to any information being disclosed to it.

What exactly is being sold? -

• It is important to determine exactly what is being sold.  It is usually quite easy to identify the immovable property but it is more difficult to determine exactly which movable assets will also be sold.  In this regard, the movable assets can be identified with reference to an asset register or a schedule attached to the agreement.
• In the case of a farm where portions thereof are let to third parties, such lease agreements are also part of the assets being sold and the respective parties’ rights and obligations in terms of such leases must be carefully scrutinized and dealt with in the agreement.
• It is also important to determine how the purchase price will be apportioned to the various assets constituting the sale.  In this regard, the seller must take note of the depreciated or tax value of movable assets to ensure that there is no recoupment on any allowances claimed against such assets.
• In relation to the immovable property, it is also important to determine the extent of the water rights associated with the property being transferred.  The investigation into the water rights should form part of the due diligence investigation.

Employees: -

• The seller and purchaser must be very aware that, if a business is sold as a going concern, section 197 of the Labour Relations Act provides that the employment contracts of the seller’s employees automatically transfer to the purchaser.
• The seller should not attempt to dismiss employees in anticipation of the sale as that will constitute an automatically unfair dismissal.  It is advisable to have a comprehensive schedule attached to the sale agreement setting out the names, ages, length of service, remuneration and accumulated leave of all employees.
• Special note must of course be taken of housing rights and privileges that farm employees enjoy.

Contracts: -

• It is important to determine the contracts that will transfer with the business.  The parties must determine what formalities are required in order for such contracts to be transferred and for the purchaser to step into the seller’s shoes. 
• An extremely important aspect associated with contracts relates to suretyships that the seller or directors, trustees or shareholders of the seller may have given to third parties with whom the seller had contracted.  The seller must ensure that such suretyships are cancelled and, if they are not cancelled, that the seller receives proper indemnities from the purchaser.

Stock: -

• The parties must agree when and how the stocktaking will be conducted.  It is important to agree the procedure of taking stock, the definition of obsolete stock and how any disputes in this regard will be dealt with.
• The payment for stock must also be considered carefully as it may impose a substantial cash flow burden on the Purchaser.

Debtors: -

• The parties must decide whether the debtors form part of the assets being sold or whether the debtors will remain with the seller. 
• Irrespective of whether the debtors remain with the seller or with the purchaser, the parties need to agree a mechanism for collection of the outstanding amounts and dealing with payments made to either the party not entitled to receive payment.

Licenses: -

• The validity of licenses required to conduct activities on the farm will be of paramount importance to a purchaser.  As part of the due diligence procedure, the purchaser therefore needs to satisfy himself that the requisite licenses are in place, can be transferred (if required) and will remain valid to give effect to the purchaser’s plans. 
• It is advisable for a purchaser to obtain a warranty from the seller that it had complied with all licensing conditions.

Warranties: -

• It is customary in transactions of this nature for the purchaser to obtain warranties from the seller in respect of aspects that the purchaser cannot properly verify through the due diligence investigation.
•  From the seller’s point of view, once matters have been fully disclosed to a purchaser, such matters must be removed from the schedule of warranties as the Purchaser then has actual knowledge of such issues.

The above matters are only some of the issues that need to be considered in disposing of or acquiring a going concern.  We suggest that you consult the appropriate professionals should you have any queries in respect of any aspects of such a sale or acquisition.  It is better to clarify matters in advance and deal with unpleasant issues upfront than discovering them at a later stage when relations may have soured.

You are welcome to contact Jacques Blignaut directly at Smith Tabata Buchanan Boyes:  021 406 9100 or jacquesb@stbb.co.za