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Thread: Selling Member interest in a CC

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    Gold Member Martinco's Avatar
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    Selling Member interest in a CC

    Firstly, what is the norm when selling total member interest in a CC with regards to debtors, creditors and bank account whether in black or red ? ( Debtors and Creditors are mainly 30 day accounts )

    Secondly, what else should the seller watch out for ?

    Thirdly, which party normally pays for the contract and who chooses the attorney ?

    The above relates to a on-going business doing day to day business and lets assume the transaction is scheduled for the end of June.
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    Firstly, you may have some formalities with this new company act. I believe that once there is a sale of interests, it has to be converted, but let me see if I can find where that suspicion comes from.

    Then ... I'm not sure what you mean by the norm. The buyer may or may not accept the validity of the sellers value put on debtors and creditors, and so there may be conditions attached to that.

    Seller has to be very careful of sureties to suppliers he may have made over the years - often without even realising it. He remains as surety even if he sells his interest in the cc. Only the supplier can release him. Then there are some hidden posts, such as being the nominated tax representative in the eyes of SARS for the cc or the assumed driver for company vehicle fines. Both need to be resigned from and the correct person appointed.

    The buyer would normally draw up the contract, but this can vary. Both sides should use their own legal representative. One will draw up the document, the other will check and request changes. Don't rely on a supposedly impartial lawyer.

    Can't you rather sell the business out of the cc? So much of a cleaner cut.

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    Gold Member Martinco's Avatar
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    I heard from some sources that the seller retains the debtors, creditors and bank for his account. This apparently makes for a "clean " sale.
    The buyer prefers a member sale.
    Martin Coetzee
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    Gold Member Singhms's Avatar
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    I am not sure if this means anything at all but what about that section something something that you have to advertise in the gazette to all people giving them time to bring forward any issues due to the sale of the business and also that in the sale document it is said that the purchaser takes over all risks from effective date?

    Not sure just throwing in something that might or might not help at all

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    Quote Originally Posted by Martinco View Post
    I heard from some sources that the seller retains the debtors, creditors and bank for his account. This apparently makes for a "clean " sale.
    The buyer prefers a member sale.
    I'm not sure how clean it is, some examples:
    - As the seller, you lose a very strong bargaining point when trying to collect your debtors book - the ability to stop supply. The guys can drag out payment forever.
    - The creditors list might seem convenient, but what about creditors that pop up after the sale has concluded. By this I mean the expense was incurrred before the sale, but wasn't on the debtors list. Does the buyer still trust the seller to pay for these? What if the seller disputes the expense? Who fights the battle?
    - Does the buyer realise that he is buying everything in the business including the stuff the seller is hiding or isn't aware of? Beware of skeletons in the closet.

    Just some thoughts for you to stew over

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    Diamond Member Justloadit's Avatar
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    To maintain good business relationship with customers, you should do warranty repairs - however what if it is a bad product? and warranties become a huge expense - then what?

    When I bough a business, I bought it as an ongoing concern, however the debtors and creditors, bank account, were the sellers responsibility, ongoing jobs and new orders then became mine. We did a stock take on the day of closure and I simply paid him cost value of the goods up to the point they were at. I used a new name for the business. With the staff, I insisted that the seller retrench them, and I would take them on as if they started the day I took over. This saved me a fortune when I closed the company down some years later the out payment was only a few weeks per staff memeber.
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    Hi All

    A couple of questions if you dont mind

    The individual concerned has a 15% members interest in the company which is family owned - members are father and 3 sons (all four work within the business as well as own). Due to matters of a personal nature etc etc as it does with family owned business it was decided by the member that he would resign from his position within the company and since no member interest agreement was in place first option to purchase was offered to the remaining members - This was in January of this year, as at today no further action, decisions or discussions (emails are read and not responded to) have been made - despite varies electronic communications requesting that the matter be brought to a close.
    My question then are these:

    I presume that the business would need to be evaluated and a value be added to the interest - how does one go about getting this done?
    Since no agreement is in place and the offer of the members interst has been made to the remaining members and they have not taken any action - is the member then be able to sell his interest to another party at an amount agreed upon by them?

    what is the time period generally given by the sellor before he offers his interest to others?

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    Site Caretaker Dave A's Avatar
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    Given the seeming standoff, I'd say get an outside offer and then revert to the existing members, giving them a few days to counter-offer. Fair chance that'll get them out of their shell.
    The trouble with opportunity is it normally comes dressed up as work.

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    @ bobbymcintosh: Sec 37 of the Act requires that all other members agree to the sale. There is not really a requirement that it first be offered to the remaining members. They ultimately indicate their agreement by signing the Amended Founding Statement (CK2).

    There are various methods in which the share can be valued; most accountants will be able to do so. Bear in mind that ultimately it is only worth that which anyone is willing to pay for it.

    @Martinco: I presume this is a different question?
    As already mentioned, a 100% sale of member's interest almost always excludes debtors and creditors, includes stock and fixed assets. The bank account, if included, is set to nil.
    For the purchaser, main risks specific to a members interest sale are:
    - undisclosed and / or unknown liabilities, including warranty claims.
    - obsolete / redundant stock
    - if debtors are included; recoverability

    For the seller:
    - Getting released from sureties
    - Business going belly up before full purchase price is paid

    If this is a material transaction, do not do it without an accountant / auditor first doing a due diligence investigation.
    Bear in mind that the sale agreement can be drawn up to say absolutely whatever you want it to, but it is binding only on the cc, the seller and purchaser.

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    Diamond Member Justloadit's Avatar
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    This is a rough situation. Been in one of those. Who in his right mind is going to buy 15% of a family owned business from you?

    You have no control, and as a minor shareholder, you will be vetoed every time. In fact the main members can always ensure that the company never makes a profit, so the 15% shareholder has nothing.
    The best here is to try and negotiate a deal, in which they agree to and feel that they are the ones to benefit, else you have nothing, and try and get out as much as possible.

    The only advantage you have here, is that if they wish to sell one day, they have to get your consent, but otherwise you are in the dwang.

    This is the reason that it is so important to have a shareholders agreement from day one, outlining the exact procedure for this kind of eventuality.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

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