PREPARE YOUR BUSINESS FOR SALE - ALIENATION OF ASSETS

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PREPARE YOUR BUSINESS FOR SALE

Alienation of Assets
23 August 2007

Selling the shares of your company may be the first step to your financial ruin. Not initially, you'll appreciate, but more likely about two years after the sale of the shares. First of all, it is important to know that there are two ways of selling your business; either as the obvious sale of the shares or interest in the company or close corporation, or as a sale of the business as an asset of the company or close corporation. With that in mind, let me tell you a story of a factory owner who was fooled into letting a buyer into his company via the share trade route:


Make a small fortune - start with a big one
It was important for the purchaser of the business that he retain the supplier contracts, obviously. In this case both the seller and the purchaser assumed that the best way of achieving this would be by way of a transfer of shares. After all, the contracts were with the legal entity - the company, not the owner of the company, and as they conspired; why should the management of the supplier be made aware of the new ownership, anyway?


This is a ploy often used where the purchaser has a checkered past, and feels that he may not pass the credit vetting process of the suppliers' credit departments. Far too often, this subterfuge is perpetrated in collusion with a desperate seller, thinking only of the immediate payment for his shares, as was the fact in this case study. The purchaser had approached the seller with an offer which was never tested on the open market or through a market related valuation. The spectre of several million Rands in the hands of the owner of a growing business, battling with cash flow, was too much for the owner to resist.


All the legal documentation had been drafted at the purchaser's expense, the lump sum was attractive and the purchaser wanted to do the deal in the next month. No time was afforded to the seller to consider his options, prospects or safety. Certainly no guidance was offered either. No war stories and warnings were related by any transfer intermediary. And there was definitely no opportunity to compare the virtues of several prospective purchasers. The final nail in the coffin of the seller was his panic when the purchaser hinted that he was looking at another, similar business.


Initially the seller had no need to worry. He was paid in full, in cash, and on time. There was no quibble about the stock value, and the purchaser was happy for him to stay in the business for no more than 3 months. The dream deal? So it at first seemed, and it was this phrase which the seller used as he boasted over beers with mates.


Two years later, the seller had spent a large portion of his selling price on the financing of a block of residential flats which were about to break even in their monthly cash flows. He'd purchased a nice holiday home on the coast, and his youngest son was in his last year at a rather expensive private school in the KwaZulu Natal Midlands. Money was beginning to tighten up a bit, but he was unconcerned because the net cash flow from his flats would soon turn positive.
Then the sheriff arrived.


While the seller had been blissfully getting on with a less stressed life, the new owners of the business had continued to run the business. The business continued to grow. And as growing businesses do, it sucked up all profits into its cash flow. Then two big deals were clinched. Unable to raise further financing from their bank, they had started to run their accounts to the limit, and then beyond. Payment periods had been extended into new months. With evidence of their new orders in hand, they managed to convince their suppliers to make those big deliveries so that they could get the big orders out, enabling them to normalize their accounts once more. As the majority of their raw product arrived, a strike matured at the fuel depot, which slowed down one of their suppliers, causing the delivery deadline to their customer to be missed.


The new managing director, a fit and apparently healthy man, suffered a minor heart attack on a Sunday evening. An absolute catastrophe for the business. Through a superhuman effort, his colleagues were able to deliver, eventually. The penalty clauses for late delivery meant that their gross profit warranties were squeezed, and consequently they were unable to make good on their promises to normalize their accounts. Suppliers lost patience and insisted on dealing with the business on a cash only basis until all outstandings were paid.


It was only a matter of time, and as the business crashed, the owners withdrew as much cash as possible from their turnover to help keep their own private heads above water. In the liquidation that followed, personal sureties of the directors were dusted off by suppliers.


This is where our seller's destiny started to turn south. Because of the secrecy surrounding the deal, his suretyships had never been replaced with suretyships from the new owners and directors. In fact he had long forgotten that as he applied for credit facilities all those years ago, he had signed an automatic suretyship embodied in the application forms. Haven't we all? In the absence of recourse to the current owners, the lack of proceeds from the liquidation, and the juicy assets owned by the only suretyship they had recourse to, creditors went with due process. Our hero today sits in sadder and more humble circumstances. His son, unable to secure a bursary or scholarship for university studies, started his own business running tourists between ORTI and the game lodges of Mpumalanga. He signs no sureties, and asks an attorney to comment on all agreements he signs. His mom died last year at the young age of 61.
So what's the alternative?


There's a difference between selling your shares in a company and selling the business as an asset of your company or close corporation. My advice on the matter: Think long and hard about selling the shares of your company, rather than the business as an asset of your company, and when you have considered all the angles; do the latter, almost without exception. In fact I cannot think of a single good reason for the sale of a company's shares. I'd be interested to know if you have any ideas on the matter. Email me if you have any comments.


CheersMark Corke