Selling a business: more than just a handshake

At first glance, the sale of a business looks straightforward. A buyer and seller agree on a value, contracts are signed and ownership changes hands. But every transaction carries a unique mix of commercial, tax and strategic considerations. The way a deal is structured can materially affect the outcome for both parties.

In broad terms, a business can be sold in one of two ways: by selling shares in the company operating the business or by selling assets of the business itself. While the distinction may sound technical, it has commercial and financial consequences.

For example, selling shares of a company means the buyer effectively ‘steps into the shoes’ of the existing shareholder, acquiring the company, history and all. This also means the buyer takes on all liabilities within the company, both known and unknown, making risk assessment critical. In contrast, selling the business on an asset-for-asset basis allows a buyer to select specific components of the business or the business as a whole, with the ability to exclude certain liabilities entirely. Each approach has different implications and requires careful planning well before a sale is concluded.

Share sales typically require more extensive warranties and indemnities, as buyers seek contractual protection against historical risks that remain embedded within the company they are acquiring. Buyers often rely on these mechanisms to mitigate the exposure that comes from absorbing all past activities of the entity.

Tax implications

When a seller disposes of shares in a company, the transaction is generally more streamlined from a tax perspective. The tax impact sits primarily with the seller. Depending on whether the shares are held on the revenue or capital account, the seller may be subject to income tax at marginal rates of up to 45% for individuals and 27% for companies, or Capital Gains Tax (CGT) at effective rates of up to 18% for individuals and 21.6% for companies. The sale of shares is exempt from Value Added Tax (VAT), although Securities Transfer Tax (STT) at 0.25% applies. Dividend tax is typically not triggered by a share sale, and transfer duty only becomes relevant if the shares relate to a residential property company (as defined in the Transfer Duty Act 40 of 1949). For many sellers, this route offers simplicity, but it remains important to understand the tax consequences early in the process.

Selling the underlying assets of a business introduces a different set of tax considerations because each asset is sold and taxed individually. Inventory, for example, is generally subject to income tax, while fixed assets such as property or equipment may trigger CGT. If the seller is a VAT vendor, VAT at 15% is generally levied on the sale of each asset. However, if the transaction is structured as a sale of a going concern that meets the legislative requirements, the VAT could be zero. Because the purchase price must be allocated across specific assets, the tax outcome can vary significantly depending on the nature of each asset. Asset sales can offer more flexibility for buyers, including the benefit of acquiring the assets at a tax cost equal to market value, but they often create a more complex tax and legal landscape for both parties to navigate.

From a buyer’s perspective, an asset sale can also be attractive because the assets may be acquired at a tax cost aligned to their market value, potentially enhancing future tax efficiency. Unlike a share sale, the underlying assets in a company do not receive a step-up in base cost when the company itself is acquired, which may limit future deductions. Additionally, in an asset sale, the way the transaction is structured can influence how employees transfer under section 197 of the Labour Relations Act, which may trigger an automatic transfer of staff when a business is sold as a going concern. This makes early legal planning essential to avoid operational and compliance challenges.