How do I sell or buy a private company in South Africa?

Starting the transaction properly

Most transactions that go wrong go wrong at the start, not the end. A seller who has not signed a clear mandate with their adviser, or a buyer who has not agreed the scope of exclusivity, ends up negotiating two things at once: the deal itself, and the terms on which the deal is being run. We begin every mandate by setting out, in writing, who is being approached, on what terms, and for how long.

A non-disclosure agreement is signed before any commercially sensitive material changes hands. It should be specific to the transaction rather than a generic template, because a vague confidentiality clause is difficult to enforce if a prospective buyer walks away with information and uses it competitively.

For a seller, the information memorandum is the document that shapes the entire process. It sets out the business, its financial position, its customer base and its growth story in a form that a serious buyer can act on. A memorandum that overstates the business invites a due diligence process that unpicks it, which costs more time than getting it right the first time.

Valuing the business

Three approaches tend to be used together rather than in isolation. An earnings multiple, applied to a normalised measure of maintainable earnings, remains the most common starting point for trading businesses, because buyers price what the business is likely to generate rather than what it has historically spent.

A discounted cash flow model is a useful sanity check against the multiple, particularly where the business has an unusual growth trajectory or where future capital expenditure will materially change its cash generation. It is rarely the number a deal closes on, but it exposes assumptions that an earnings multiple alone can hide.

An asset-based valuation matters where the business holds significant property, plant or other tangible value that is not fully reflected in its earnings, or where the business is being wound down rather than sold as a going concern. Using the wrong method, or relying on only one, is one of the most common reasons negotiations stall on price.

Due diligence and what it uncovers

Due diligence tests whether the business is what the information memorandum said it was. It covers financial records, material contracts, employment arrangements, litigation history, regulatory compliance, intellectual property ownership and, increasingly, the state of the company's statutory records at CIPC.

Findings from due diligence feed directly into the warranties and indemnities in the sale agreement, and often into a price adjustment or a portion of the price being held back. A seller who anticipates likely findings and deals with them before due diligence begins usually preserves more value than one who is caught by surprise midway through negotiations.

Sale of shares or sale of the business

A sale of shares transfers ownership of the company itself, including all its assets and liabilities, known and unknown. A sale of business as a going concern instead transfers specific assets, contracts and employees out of the selling company into the buyer, leaving historical liabilities behind with the seller unless expressly assumed.

The choice affects price, tax treatment, employee transfer mechanics and the scope of warranties required, and it is not simply a drafting preference. We work through which structure suits the specific transaction before documents are drafted, because moving from one structure to the other midway through negotiation is expensive.

• Sale of shares: buyer takes the company as it stands, warranties are extensive
• Sale of business: buyer selects specific assets and contracts, liabilities generally stay behind
• Employee transfer mechanics differ materially between the two structures

Competition Commission merger control

Transactions that meet the turnover or asset value thresholds set under the Competition Act 89 of 1998 are notifiable mergers and cannot be implemented before clearance is obtained from the Competition Commission, or in larger cases the Competition Tribunal. Filing fees are payable on notification and scale with the size of the transaction.

Failing to notify a transaction that meets the thresholds, or implementing it before clearance, exposes the parties to penalties and can unwind the deal. We assess merger notifiability at the outset of a transaction, not after the sale agreement has been signed, because the timing of clearance affects the closing date the parties can realistically agree to.

Warranties, escrow and earn-outs

Warranties and indemnities allocate risk for matters that due diligence could not fully verify or that only crystallise after closing. A well-drafted warranty schedule is specific to the business rather than a boilerplate list, and it is backed by disclosure that narrows what the seller is actually promising.

Where price and risk cannot be fully agreed at signature, an escrow arrangement holds back part of the purchase price against warranty claims for an agreed period, and an earn-out ties part of the price to the business achieving agreed performance after closing. Both mechanisms require careful drafting on triggers, calculation and dispute resolution, because vague earn-out language is one of the most litigated areas in private company transactions.