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Start-up Advice

Buying a Business? Buy Right!

Understanding what it means to buy a business vs buying a company.

Sarah Lawrence

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In the commercial world, the terms ‘company’ and ‘business’ are often used interchangeably. Statements such as “my business employs 20 people” or “my company manufactures handbags” are commonplace, but what exactly do they mean?

In law, a company and a business are distinct concepts, and the purchase of a company has different legal consequences to the purchase of a business.

A clear understanding of the two is useful to businesspeople looking to obtain control of a particular business. This article provides an overview of how a company differs from a business, with reference to some of the key consequences of buying a business versus buying a company.

The tax and employee-related aspects of the two transactions are not dealt with, although they are important aspects of each transaction. For this and other reasons, the following should not be understood as legal advice.

What is a company?

A company is a legal concept, intended to promote commerce by allowing people to conduct business without personal liability. A company, once validly registered in terms of the Companies Act, No. 71 of 2008, has legal personality – in other words, it is able to transact in the same way as a natural person.

Just as a natural person owns assets, and is directly liable for his debts, so a company may also own assets and is directly liable for the debts that it incurs, generally to the exclusion of its shareholders.

What is a business?

A business is simply a collection of assets, both physical and non-physical, which generate income, as well as liabilities (debts)  that have arisen in the course of trying to generate that income.

A shoe manufacturing business, for example, would consist of:

  • physical assets, such as machinery and equipment;
  • contractual relationships with trusted suppliers and important customers;
  • intellectual property, such as shoe designs and trade marks (its brand name, perhaps);
  • accounts receivable and cash in the bank.

In addition, a number of debts might have arisen in the running of the business, such as amounts owed to suppliers for raw material, rental amounts owed to the landlord of the premises from which the business is conducted, and amounts owed by way of salary to people who work in the business.

A business is not a legal person and has no legal personality. It cannot enter into commercial transactions in the way that a natural person or a company can. In other words, a business cannot sign a contract. Rather, a business will be owned and operated either by a natural person (in other words, a sole proprietorship) or by a legal person such as a company.

A useful way to avoid confusing a company with its business is to remember that a company could own and operate a number of different businesses.

Acquiring control of a business

Let’s assume that Mr Smith has his eye on a successful shoe manufacturing business. The shoe business is owned and run by a company, Shoe Co Proprietary Limited. Shoe Co has two shareholders, Mrs and Mrs Sole.

Mr Smith decides he’d like to own the shoe business and run it for his own benefit. He has two options. He could buy all of the shares in Shoe Co from Mr and Mrs Sole, thereby acquiring the company which owns and operates the shoe business. Alternatively he could buy the shoe business from Shoe Co itself.

Buying the shares

Should Mr Smith choose to buy all of the shares in Shoe Co from Mr and Mrs Sole, he will become the only shareholder of Shoe Co. Mr Smith will therefore be in control of Shoe Co and all of its operations (including the shoe business). In this scenario, Mr and Mrs Sole will be the sellers, and Mr Smith will pay the purchase price for the shares to Mr and Mrs Sole.

The key disadvantage of this approach for Mr Smith is that Shoe Co, as a legal person, will continue to be liable for all the debts incurred by it before Mr Smith took over. Shoe Co may, for example, owe significant amounts to suppliers, to the Receiver of Revenue, or to other third parties, which Shoe Co remains liable to pay.

The existing debts will affect Mr Smith’s back pocket because, no matter how successfully the shoe business is run after he takes over, the amount available as profit for dividends to Mr Smith will necessarily be less after Shoe Co has paid its various debts.

It is for this reason that prudent purchasers insist on a due diligence investigation being conducted into the affairs of a company, prior to acquiring the shares. The purchase price for shares in a company burdened by significant debt should be correspondingly reduced.

As mentioned earlier, a company can own a number of businesses. If Shoe Co owns more than one business, buying the shares in Shoe Co is not the best way for Mr Smith to obtain control over the shoe business, because he will obtain control over all the other businesses operated by Shoe Co, at the same time.

Buying the business

The other option is for Mr Smith to buy the shoe business from Shoe Co itself. In this scenario, Shoe Co is the seller, and Shoe Co will therefore receive the purchase price. The shareholding in Shoe Co remains unchanged, and Mr and Mrs Sole continue to be its shareholders.

In this scenario, Mr Smith is buying the collection of assets which make up the shoe business from Shoe Co. He might be taking on some of the shoe business debts as well. The key advantage of this option for Mr Smith is that he will be able to negotiate which of the shoe business debts he will take over, and which debts will remain behind with Shoe Co.

Mr Smith might agree, for example, that he will assume and be liable to pay debts due and owing by Shoe Co to its suppliers, as long as those debts are no more than three months old. All other debts will remain with Shoe Co, and it will continue to be liable to pay those debts.

By buying the shoe business out of Shoe Co, as opposed to buying the shares in Shoe Co, Mr Smith protects his commercial operations and his finances from Shoe Co’s debts and liabilities.

Of course, the extent to which Mr Smith is prepared to assume Shoe Co’s debts will likely affect the purchase price payable for the shoe business. In general, the more debts the purchaser agrees to assume, the lower the purchase price for the business.

Buying the shoe business out of Shoe Co will also work well for Mr Smith where Shoe Co owns a number of businesses which Mr Smith has no interest in acquiring. Only the shoe business will transfer to Mr Smith, while the rest of Shoe Co’s operations will remain behind.

Commercial circumstances

The decision as to whether control of a business which is housed in a company is best obtained by a share purchase or the purchase of the business itself is always dictated by the commercial circumstances of the particular transaction.

In very general terms, purchase of the business is more appropriate when:

  • the buyer does not wish to take over all of the company’s liabilities, or there is a danger of undisclosed liabilities in the company;
  • the buyer wishes to acquire only some of the company business assets and not all of them;
  • the company owns a number of businesses and the buyer is only buying one of them; or
  • there are difficulties with acquiring the majority shares in the company, perhaps due to pre-emptive rights, or where certain shareholders do not want to sell their shares.

The purchase of the shares in a company might be more appropriate when:

  • the success of the business depends on certain agreements which the company is not allowed to transfer, such as a licence agreement, a supply agreement or an important lease;
  • one of the business assets is a property, which the purchaser wishes to acquire without going through the actual transfer process;
  • the sellers insist on selling their shares in the company, rather than selling the business out of the company; or
  • tax considerations dictate that a sale of shares will be more tax efficient than a sale of business.

The agreements

Since the transactions are different, the agreements regulating each transaction are also different. A sale of a business agreement will typically cover aspects such as:

  • which assets are to be sold, and which liabilities (if any) are to be transferred;
  • whether any consents or approvals are required before important contracts may be transferred;
  • the purchase price for the assets, which frequently includes a portion for goodwill;
  • the date upon which the purchaser will become the owner of the business;
  • the manner in which delivery of the assets will take place;
  • whether the transaction will be zero-rated for VAT, provided both the seller and the purchaser are registered VAT vendors;
  • whether the transaction is to be advertised in terms of section 34 of the Insolvency Act, No. 24 of 1936; and
  • whether the seller makes any warranties regarding the business, and whether the seller has put a limit on its potential liability to the purchaser, should any warranty be breached.

A sale of shares transaction will typically cover aspects such as:

  • how many shares in the issued share capital of the company are to be sold;
  • whether the sellers have any shareholders loans against the company, and whether those will also transfer to the purchaser;
  • the price to be paid for the shares;
  • whether any approvals or consents are required before the shares may be sold (such as obtaining the consent of any other shareholders);
  • the manner in which delivery of the shares will take place (usually by the seller handing its share certificates and a signed share transfer form to the purchaser); and
  • whether the seller makes any warranties regarding the shares and the company, and whether the seller has put a limit on its potential liability to the purchaser, should any warranty be breached.

In practice, the decision as to whether the purchase of a business or the purchase of a company is more appropriate is determined not only by the factors discussed here, but by tax considerations and considerations relating to the employees in the business, if any.

For this reason, it is usually advisable to obtain legal advice on the best approach under the circumstances.

Sarah Lawrence is a commercial legal consultant at Caveat Legal. She holds a BA in English, Sociology and Industrial Psychology from the University of Stellenbosch, an Honours degree in English Literature from the University of Cape Town, and a BA LLB from the University of Cape Town. Sarah completed her articles at Edward Nathan Sonnenbergs and was admitted as an attorney of the High Court of South Africa in 2010. She specialises in Corporate Commercial Law, with a focus on transaction work.

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Start-up Advice

4 Tips To Secure Funding For Your Start-up

Here are 4 tips to help you secure funding for your start-up.

Ellie Martin

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Entrepreneurs seek to create new and ingenious ideas. Successful business owners are adept at looking at things in new and interesting ways. Their creativity fuels everything they do. Blazing through the initial steps of opening your own start-up can seem like a breeze if you’re endowed with this creative mojo, but you still may find yourself stuck at the very last step of starting your business.

Finding funding is undoubtedly the most difficult part of starting a business, and securing it requires the most creativity of all. Still, you can only stretch your creativity so far. Luckily, there are a few ways you can improve your chances of getting the money you need, regardless of whether you decide to attract angel investors or venture capitalists, or if you decide to apply for small business loans and grants.

Here are 4 tips to help you secure funding for your start-up:

1. Seek alternative funding opportunities

Before taking out a massive bank loan, consider these other funding options:

The vast majority of entrepreneurs either use their own funds to start their business or borrow money from friends and family. According to Forbes, 90% of start-ups fail, with 25% of them failing within their first year of operation. Due to this rate of failure, if it really is impossible for you to attract investors or secure venture capital, it is still best to avoid putting up your own money. Before draining your personal savings account, look into other options, such as crowdfunding. Research small business grants as well, as these can help cover gaps in funding.

2. Write a top-of-the-line business plan

If you’re interested in attracting investors, you’ll need a solid business plan to lure them in. Regardless of how wonderful your idea is, you must communicate that idea effectively and back up your claims with thorough research. A tightly organised business plan has the ability to assure investors of your industry know-how. It will give them a picture of how you plan to run your business and how accurately you can assess and address risks.

An entrepreneur who has a business plan with a punchy executive summary and a precise market analysis in hand is more likely to attract shrewd investors than one with only an inspired (and undeveloped) idea.

Related: Business Plan Format Guide

3. Network, network, network

The absolute best way to find investors is to network. Generally, you never want to cold call investors with your business ideas. You want to build relationships naturally with those in your industry and in your local community. Talk with other business leaders and go to local events. Offer to help other entrepreneurs and established business owners. They may return the favour by introducing you to reliable angel investors or they may steer you to a venture capital firm that helped launch their start-up. They may even offer to pitch in some of their own cash, if they really take to your idea.

Moreover, to make sure your networking efforts are effective, try to pinpoint the audience who would be most interested in your idea.

“Network selectively,” advises American author and entrepreneur, Steve Pavlina. “Take the time to build a profile of your ideal customers, and target your networking activities to reach them. Speak to those who are already predisposed to want what you offer.”

Building connections is a vital part of creating your business. You’ll need to build new ones and strengthen existing ones, not only to get the funding you need in the short term, but also to survive as a business in the long term. 

4. Be prepared to compromise

Asking for funding for your startup means experiencing failure time and time again. Most of the investors you’ll encounter will pass on your idea. You shouldn’t take this to heart. It’s all a part of the process. You may find that in order to get the funding you need you’ll have to give a small piece of the business over to an angel investor.

Your first crowdfunding effort may fall short, and you might have to incorporate feedback from backers and implement changes to the core of your idea to crowdfund successfully the next go around. Don’t be too rigid with your vision. If you’re willing to make some slight changes, you could have a much better shot at landing a deal.

Securing funding for your start-up is no easy task, but it is certainly not one you have to do alone. Enlist the help of friends, family, and business associates to help you craft a superb business plan, meet other entrepreneurs and investors, and make revisions to your idea. Use their input to help you find other ways to fund your start-up, such as small business grants and crowdfunding. Use these 4 tips for securing funding for your start-up, continue researching your target market and refining the way you approach investors. Without a shadow of a doubt, if you’re willing to seek the advice of others and compromise when necessary, you’ll find a way to fund your start-up.

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Start-up Advice

7 Strategies For Development As An Entrepreneur

What follows are seven simplified yet key strategies to develop yourself as an entrepreneur which are a hybrid of the authors’ practical experience and what he has learnt from very successful entrepreneurs, coaches, and consultants over several years.

Dirk Coetsee

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What lies behind you and what lies in front of you are tiny matters compared to what lies inside of you” – Ralph Waldo Emmerson


I am an entrepreneur, I surround myself with business minded people, I am privileged enough to be mentored by great leaders. I speak to visionaries, I write about them and learn from them.

What follows are seven simplified yet key strategies to develop yourself as an entrepreneur which are a hybrid of the authors’ practical experience and what he has learnt from very successful entrepreneurs, coaches, and consultants over several years.

A wise man once told me, “A higher level of consciousness does not mean you are better than anybody else it just means your mind sees from a higher vantage point and therefore you see clearer than most.”

Related: 8 Entrepreneurs Share Their Best Advice For When The Going Gets Tough

Those wise words lead us into explaining the first strategy:

1. Expand your consciousness

Simply put your consciousness is nothing but what you are aware of. By increasing what you are aware of through experience, study and honest self-reflection and by inquiring deeply into every aspect of your business as to increase the quality of your awareness you are enhancing the quality of your experience as an entrepreneur.

The second strategy often referred to as priming or framing is commonly used by successful entrepreneurs:

2. Priming or framing

Priming or framing is creating a positive mindset first thing in the morning which builds mental strength and the capacity to face the day with a very good attitude. This is, in essence, done by creating a morning ritual or habit for yourself which can take whatever form you prefer, as long as the outcome of it is a stronger and better you.

Some prefer meditation and/or prayer. Others repeat affirmations in the mirror. Some take the quiet early morning hours as the opportune time to read and learn more about their craft. Exercise is another way to start your day in a positive way. See this exercise of Priming or framing as an investment earning compound interest over a period of time.

nelson-mandelaGoogle whom any famous leader or entrepreneurs’ mentor was and a name or many will most certainly pop up. Nelson Mandela’s’ mentor was Oliver Tambo, Warren Buffet holds the Dale Carnegie certificate proudly displayed on his office wall in high regard, the famous investor Ray Dalio is still coached by Tony Robbins.

Related: (Podcast) Being An Entrepreneur Is Painful

That explains why you should:

3. Be willing to be mentored

When I facilitate training or a coaching session a common objection to being mentored is: “ Yes , but I do not know anyone that could mentor me.”

Honestly, what a lame excuse. Most servant leaders understand that it is part of their duty to society by leaving other servant leaders and/or entrepreneurs behind and are actually just waiting for your call.

It is really as simple as that, make your list of people that you look up to and want to be mentored by and call them, sincerely tell them how much you admire them and ask for guidance and mentorship. To those whom knock sincerely a door will be opened.

There is no such thing as a “self-made man” as everyone has received some help in some shape or form along their journey of entrepreneurship.

It is much harder to give up on something that you really have worked hard for over a long period of time as opposed to something that you have approached with half-hearted intent and little effort.

Therefore:

4. Hard work compounded by smart work

Hard work is not only something that you should do to stay ahead of the competition but a necessity in order to build resilience.

When you have lost sight of your purpose and vision as an entrepreneur decision making becomes drastically harder, your morale might be affected negatively, and your bank balance might suffer as a consequence.

So:

5. Ensure that you have constancy of purpose and a clear Vision

A very effective way of priming and/or framing is to remind yourself of your purpose and vision every morning. Make your Vision and purpose visual by displaying it clearly at your office. An entrepreneur cannot talk regularly nor enthusiastically enough about his or her vision and purpose. When you have not wholeheartedly bought into a vision and purpose how can you expect your team to?

ian-fuhrThose whom embody servant leadership of which the founder of Sorbet, Ian Fuhr is a prime example know that unconditional giving as a principle not only builds character but empowers others so that we can not only grow as businesses but as people.

Related: 10 Young Entrepreneurs Under 30 Share Their Start-Up Secrets

That is the reason for:

6. Giving without expecting anything in return

When you give of yourself unconditionally you have a true servant heart and your clients will not only be loyal, but they will love you in general. Giving unconditionally feels good and receiving unconditionally places no burden on you and creates a wonderful and vibrant work atmosphere, generally speaking.

When you only take a stand on your principles and values during good times yet allow them to crumble in the face of challenging times “your house is divided and cannot stand”.  Your principles and values must become ingrained practises and not just frivolous words.

Taking the aforementioned into account:

7. Have non-negotiable principles and values that you live by

As an example, if when respect is a non-negotiable value that you live by you will refrain from losing emotional control and will be willing to walk away from a conversation where someone dis-respects you.

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Start-up Advice

7 Ways A Tech Start-up Is Like Starting A Band

Building a successful tech start-up and putting together a band are more similar than most entrepreneurs and musicians would like to admit.

Alice Goldstein

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Building a successful tech start-up and putting together a band are more similar than most entrepreneurs and musicians would like to admit. The truth is that both of them require a lot of hard work, sleepless nights, self-induced poverty and other big sacrifices. Like a startup, says Alex Grossi of Quiet Riot:

“The process that once entailed a songwriter or record label spending countless hours and dollars recording, manufacturing and marketing music is gone. It is now up to the artist to figure out what the next move is in the industry.”

Succeeding in the music or the business worlds can also bring a number of great benefits. Becoming a successful entrepreneur can open up doors to new, more fulfilling projects and rewards. Moreover, you will have more control over your future ventures and have a big role in the success of any project you work on.

Visualising your tech start-up as a band can help you get creative, and may even help catapult your company to success. Because of this, I’ve put together a list of seven ways a tech start-up is like putting together a band, so you can put on your inspirational hat and make your company more than just a one-hit-wonder.

1. Be honest with your skill set

The first thing you need to consider when starting a band is the instrument you can play and at what level. The very same can be said for tech start-ups. Technology now influences virtually every single part of modern society, so you need to consider the skills you have available and determine how you can use them to create a good product.

David Ellefson, the bassist from Megadeth, owner of Ellefson’s Coffee and EMP label group shared his learning experience forming and playing in rock bands, in which he said:

“The idea of a rock band is selling this dream of the ultimate creative journey and endless freedoms. Yet, things like showing up on time, knowing your role (and respecting the roles of others!), disciplined practice, marketing &; promotion are as much part of the band experience as getting onstage and rocking the house each night.

Related: How Craig Bright And Brian Little Launched Rocking The Daisies

I learned many years ago that just because I was successful in music didn’t qualify me to be an expert in other fields, too. My successes came as a result of discovering my passion and honing in on skills that came natural to me. That led to relationships that opened doors for my success. We’ve all been blessed with certain skills, talents, and abilities and having success (and happiness!) usually lies with our passion allowing us to be the best we can be with those abilities in a chosen field.”

The good thing is that you don’t only have to focus on your particular expertise. Each band member offers a valuable set of skills that contribute to the quality of the music. In this case, your band members will be your start-up team. Take a look at what each team member brings to the table and make sure you are applying them to their full potential.

2. You need to be driven by passion

business-passionJust because you love music doesn’t mean making music will just happen, and in the words of Phil X the guitar player of Bon Jovi:

“There are no short cuts. You have to kick your own ass before you kick everyone else’s.”

Once you have identified your passion, the next step is acquiring the skills to realise your dream. This may seem tricky at first, but try to get creative and figure out a way to combine your skills and passions to build a valuable business.

If you are preparing to launch a tech start-up, you should definitely find something you are passionate about. Not only will this make your work easier, but you will always find motivation to give your best, even on bad days. Moreover, you may find that working on something that you really love will actually bring you joy and work as extra fuel when your tank is running low.

3. Put together a stellar lineup

If you were building a band and you knew the best drummers and bass players in town, you would definitely reach out and try to recruit them, right? Well, the same thing goes for your tech start-up. You should review all your options and scour your connections until you find the combination that best suits your vision.

Now, remember that putting together a killer lineup isn’t only about finding the best of the best. You also need to find a balance and make sure that the talent you bring on board will compliment the whole team. If you have two great candidates, but you think they won’t work well together, you are better off choosing the one that works best with the rest of your ensemble.

4. Practice makes perfect

practiceOne of the most important aspects of having a band is practicing frequently. Musicians already have a high level of dexterity, but that doesn’t mean the band will sound good right off the bat. By practicing together, you can make sure everyone is on the same page and organise your act.

As a start-up, the equivalent of having band practice is working as a team. Although everyone learned the skills needed to carry out their specific tasks separately, you also need to work as a team to make sure everyone is in sync.

A good way to do this is to give everyone individual tasks, and also assign at least one communal task a week. This will give you time to sit down with your team members, gauge that everyone is on the same page, and clear the air if they are not.

Related: Will.I.Am: The Man Who Took Music To Mars

5. Networking is the KEY

Any successful musician will tell you that networking is as important as the quality of your music. Networking with the right people can help you land gigs, get your music to the right listeners, and make a name for yourself by rubbing elbows with established industry giants.

The reason why I say that networking is KEY to any tech start-up is because it’s what will enable you to Keep Expanding Yourself. Building connections with established tech companies and influencers can help you get your name out there and land significant contracts. Not only this, you will also be able to gain valuable insights from the people that already thrive in your industry.

6. Find your audience

audienceMost bands already have a good idea of who their followers are or will be, and they focus on getting gigs in venues that will attract these fans. This makes their promotion easier and increases the chances of hosting a successful event. Not only this, in order to adapt to your audience’s changing needs and preferences, you must be ready to diversify wherever necessary.

Marq Torien from BulletBoys put it beautifully “Always know at some point you have to reinvent yourself in your music career. It’s a must, if you want to keep your audience and fans who love what you or your group does. All the great musicians and artists have done so at some point in their careers. Don’t have fear of diversity”. Marq stayed true to his words as their highly anticipated March 2018 Frontiers Records release “From Out of The Skies ” is truly one of their most diverse album to date.

Although it’s a bit more complicated, you should identify your start-up’s perfect clientele in the form of fictional buyer personas. This requires a good amount of market research, but it will give you essential information about your potential customer base. You’ll be able to create marketing campaigns that speak directly to your buyer personas through the channels they use the most as well as diversify based on changes in consumer demand.

Related: Kim Coppen-Watkins On Having And Maintaining Strategic Growth

7. Use all available promotion channels

It’s no secret that the most popular bands are featured on radio, television, the internet, and just about any other channel you can imagine. Besides boosting their collective egos, bands tend to take advantage of all promotional channels they have available because it guarantees it will extend their reach as far as possible.

You should also consider all the marketing channels you have available and take advantage of every single one of them. Now, if you start-up is in its early stages, you may not be able to invest huge amounts into advertising. That being said, you can always get creative and use free marketing channels such as social media platforms, blogs, and YouTube videos.

Finally …

Launching a tech start-up may not sound as glamorous as being in a band, but they are more similar than you may think. Always remember a successful tech start-up requires patience, a lot of behind-the-scenes work, the ability to adapt to change, and a well-organised team. Follow the tips outlined above to pave your way to success and enjoy the perks that come with it!

This article was originally posted here on Entrepreneur.com.

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