Guide to Buying a Business in South Africa

In the broad scope of entrepreneurship, what naturally comes to mind could be the process of starting a business from scratch, but that isn’t the only way to approach entrepreneurship.

You can also buy your way into entrepreneurship through acquisition entrepreneurship, which is also known as Entrepreneurship Through Acquisition (ETA). In simple terms, you’d be buying a business.

Buying a business has many benefits over starting one from scratch. These benefits include cutting down the time it would have taken to start one from scratch, having readily trained and available staff, access to a database of existing customers, immediate cash flow, and more.

As much as there are benefits to buying a business, there are disadvantages too, such as buying one that’s in ruins. To help you avoid making unnecessary mistakes, we’ve compiled a guide to buying a business in South Africa.

The first thing you would want to look at when you’re considering buying a business is the legal aspect. Here’s a step-by-step guide to help you navigate this process:

1. Define Your Objectives and Budget

Clearly outline what you aim to achieve by buying a business and how much you’ll need. Is it to expand your current business operations, or to enter into a new market? Consider all the costs, including legal fees, the purchase and other costs such as changes you might want to make.

2. Research and Identify Potential Businesses

To find businesses that match your goals and budget, it’s crucial to conduct thorough research. Key factors to consider during your research include the industry the business operates in, its location, the size of the business, and its financial performance.

3. Conduct Thorough Due Diligence

When conducting your due diligence, there are a few necessary boxes you need to tick. Firstly, you need a financial review of the business you want to buy. This involves a thorough analysis of the business’s financial statements, tax returns, and other financial records to assess its overall financial health and profitability. Secondly, it’s crucial to ensure legal compliance by verifying that the business adheres to all applicable laws and regulations.

Another important aspect to review is contracts and agreements; ensure they are thoroughly examined to understand the business’s obligations and potential risks. Finally, you must identify any intellectual property owned by the business and assess its value.

4. Negotiate Terms and Draft a Sale Agreement

The fourth step when buying a business is to negotiate the terms of the sale and draft a sales agreement. Key aspects of the negotiation process include determining the purchase price, outlining payment terms, and addressing any contingencies that may arise.

5. Obtain Regulatory Approvals

After negotiating the terms and drafting a sales agreement, the next step is to obtain regulatory approvals. Depending on the industry and size of the transaction, approval may be required by the Competition Commission. Additional regulatory approvals may also be required.

6. Register the Business with the Companies and Intellectual Property Commission (CIPC)

Follow the CIPC’s process for registering the transfer of ownership.

7. Register with the South African Revenue Service (SARS)

When buying a business in South Africa, it is critical to ensure that all tax matters are in order. This means you will need to obtain a Tax Clearance Certificate from SARS, and you will need to ensure that the business has met all its tax obligations and has no outstanding tax liabilities.

8. Transfer Licenses and Permits

When transferring ownership of a business, it is essential to ensure that all necessary licenses and permits are transferred to you, as the new owner. Additionally, the new owner must ensure that the business continues to comply with all relevant health and safety regulations to maintain a safe and legal operating environment.

9. Notify Stakeholders and Update Records

Once the business is legally transferred to you, it’s important to keep everyone in the loop. Let your employees know about the change in ownership, and make sure to inform both your suppliers and customers. Lastly, don’t forget to update your banking records to reflect the new ownership.

10. Maintain Ongoing Compliance

To stay compliant, you need to keep up with several tasks. This includes filing your annual returns with the CIPC to maintain your company’s active registration status.

Additionally, make sure you’re submitting tax returns and payments to SARS on time and staying informed about any changes in laws or regulations that could affect your specific business sector. It’s crucial to stay on top of these things to ensure your business remains compliant.

Before you buy a business, you have to conduct a thorough risk assessment to ensure you avoid making any mistakes you’d regret in the long run. Here is a list of factors to include in your risk assessment:

1. Financial Risks: Look at the health of the business with a fine-tooth comb. Look at the profitability of the business, how stable their cash flow is, debt, as well as financial trends in customer behaviour.

2. Operational Risks: Assess the operations of the business, how much the business leans on the current owner, as well as key employees and their behaviour in the business. Also, look at how solid the supplier and vendor relationships are in the business.

3. Legal and Compliance Risks: Evaluate the business’s legal history, any pending lawsuits or litigation, and potential compliance issues with industry regulations and standards.

4. Industry Risks: Consider whether this is a growing industry that would benefit you in the long run.

When you have an interest in buying a specific business, you have to assess its fair market value to make sure it’s a good investment. To do this, you need to review the competitive position of the business, its financial statements, customer contracts, and industry growth. You should also consider risks such as declining revenue.

There are three primary valuation methods, which are:

• Asset-Based Valuation: With asset-based valuation, the net worth is calculated by subtracting liabilities from the total assets of the business.
• Market-Based Valuation: This form of valuation places a comparison between the business and similar businesses that have recently been sold.
• Income-Based Valuation: Income-Based Valuation uses methods like Discounted Cash Flow to place an estimate on future earnings.

To simplify this process, hiring a business valuation expert can help ensure an accurate valuation and mitigate risks.

Just as there are financing options for businesses that are built from scratch, you can also access financing options for acquiring a business. Acquiring a business doesn’t come cheap, so it’s not easy to fund it on your own. The funding options for buying a business in South Africa are:

Bank Finance

To apply for bank finance, you would need to visit a bank branch, as they may need to give you certain documents. For the bank to finance you, they need an evaluation of the risk of the business you want to purchase. With bank financing, your personal credit record will also be assessed.

Angel Investors

Angel investors use their own money to finance a business. They typically allow a certain timeframe before expecting a return on their investment. Additionally, many angel investors offer guidance and mentorship to the businesses they support, leveraging their own skills and experience.

Private Equity

Private equity funding is when several third-party investors pool funds to finance a business. Private equity investors are willing to invest large sums of money. Additionally, private equity investment periods are a lot longer in comparison to other funding institutions.

Yes, you can. But, it comes with significant risk. In this guide, we’ve given you tips to help you buy a business. If you have experience in business acquisitions, finance, and handling the legal aspects of a business, you can handle those tasks yourself.

Key Professionals to Help You Buy a Business Successfully

If you want to avoid risk and need guidance on the different kinds of experts you’d need, here’s a list:

1. Business Broker: A professional who specialises in connecting buyers and sellers of businesses. They can help you find potential businesses, make negotiations easier, and guide you through the transaction process.
2. Lawyer: An attorney with experience in business law can help you review contracts, conduct due diligence, and ensure legal compliance throughout the acquisition.
3. Accountant: A financial expert can assist you in evaluating the financial health of the business, analysing financial statements, and assessing tax implications.
4. Business Valuation Expert: A specialist who can determine the fair market value of the business you’re considering buying, using various valuation methods.
5. Banker or Financial Advisor: These professionals can help you explore financing options, secure funding for the acquisition, and manage your financial strategy.
6. Human Resources Consultant: If the business you are buying has employees, it may be valuable to consult with an HR professional to assess employee contracts, benefits, and potential HR issues.