FANews
FANews
RELATED CATEGORIES
SUB CATEGORIES Buying  |  Selling | 

Selling your business or company – which option will put more money in your pocket?

26 May 2015 Chris Norris, BDO South Africa

Quite often, the net proceeds receivable by the owner from the sale of a business are significantly less than what was initially expected when the selling price was agreed upon with the purchaser. In fact, when the net proceeds receivable by the owner are calculated, the owner often realises that the business is worth more to keep than to sell.

Chris Norris, an Audit and Assurance Partner at BDO South Africa, says that one of the main reasons for this has to do with the way that the sale of the business is structured and the tax effects of the particular structure.

Norris provides the following insight into the finer financial realities of selling a business or company:

“When selling a business that is operated in a company or close corporation, the sale can either be structured as the sale of the business out of the company or CC, or the sale of the shares/member’s interest in the company or CC. Very different tax effects arise from each of these options - depending on the specific circumstances of each case. Often it costs significantly more in taxes (recoupments of wear-and-tear on assets), CGT on sale of business and Dividends Tax when selling the business out of the company or CC than when selling the shares themselves.”

“Take the simple example of a business in a company worth R5 million, where the net tangible assets fairly valued are worth R3 million and the goodwill factor is worth R2 million. Assume that:

• the goodwill has no base cost to the company;
• the business does not qualify as a ‘small business corporation’ for income tax purposes
• the owner of the shares in the company is one individual who acquired all of his shares for nominal value when the company was formed after 2001;
• the owner holds his shares as capital assets; and
• the fixed assets cost R500 000 and that all of this cost that has been written off as wear-and-tear allowances will be recouped.

If the owner sells the business for R5 million out of the company, the company will be liable for CGT on the sale of the goodwill, income tax on the recoupment and dividends tax on the dividends declared to get the cash into the owner’s pocket. In this scenario, income tax on the recouped wear-and-tear would amount to R140 000, CGT would amount to R839 160 and dividends tax R603 126, giving total taxes of R1 582 286. Cash in the owner’s pocket will amount to around R3.418 million.”

However, Norris advises that if the owner sells his shares for R5 million, he will be liable for CGT of R682 650 at most and will receive cash in pocket of R4.317 million - a better result by almost R900 000. If the owner is 55 years of age or older, there is a special dispensation whereby the CGT may be even less than this, providing that the shares are sold.

“From a purchaser’s perspective, it is preferable to purchase the business out of the company. This allows the purchaser to pick the assets that they are interested in and ensures that they will not be liable for any undisclosed liabilities that may surface in the future. Also, acquiring the company or CC means that the purchaser in effect assumes the seller’s latent CGT and dividends tax bills on the net asset value and value of the goodwill. The seller is therefore usually under pressure to sell the business out of the entity and should ensure that the sale is structured as efficiently as possible to minimise transaction taxes and in turn maximise net cash received.”

Norris concludes that the seller needs to be aware of where significant transaction taxes will be incurred, thereby assisting them to negotiate the selling price on favourable transaction terms.

Quick Polls

QUESTION

Do you believe the FIA awards help product providers to understand the service expectations of the intermediary?

ANSWER

Yes
No
Maybe
A E fanews magazine
FAnews August 2019 Get the latest issue of FAnews

This month's headlines

Create designer policies through AI
Are advisers in a precarious position?
A claim, COIDA and a dog bite
Non-disclosure never an innocent fraud
Prescribed assets: The threat to pensions
Cannabis and the issue of trust
Getting the most from disability claims
Subscribe now