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Thread: Buying company pending legal action

  1. #1
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    Buying company pending legal action

    Good evening members

    I am considering buying a thriving auto repair business which is a PTY LTD. The company is only two years old and has one director who is also the only shareholder. The company has a huge and profitable customer data base and it wouldn't be easy to pass up this opportunity however there are a few details which I am having trouble understanding and making my mind up has become a difficult one.

    My key concerns are the owner has been running the business for two years without registering with SARS and currently has two pending legal actions against it buy unhappy customers. I have checked and the company has an excellent reputation with the the exception of the two unhappy customers, one who is suing the company for 52K and the other who has sent the company a letter of demand for refund.

    The owner has been very open about everything and is only selling the company after finding out he has terminal illness and can no longer run it. The equipment is all rental contract equipment and so I would be installing my own instead.

    The concerns I have are:

    1. If I buy the company, will I become party to the pending legal action?

    2. Since the owner established the company as a PTY LTD two years ago but never registered with SARS, would there be any legal issues if I buy the company now and register it with SARS?

    If there are any other pointer any member here can give me it would be of great help in making a final decision as buying the company or not.

    Kind Regards

    G

  2. #2
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    my apolgies: *by not buy

  3. #3
    Diamond Member Justloadit's Avatar
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    IMHO, you buy the customers/physical position only, not the company, as there may be other skeletons that may creep out later. There may be sureties, and other unknowns.
    Start a new company with a similar name, getting current owners permission.
    Victor - Knowledge is a blessing or a curse, your current circumstances make you decide!
    Solar and LED lighting solutions - www.microsolve.co.za

  4. #4
    Site Caretaker Dave A's Avatar
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    I'm with Justloadit - If you're going to buy, buy the business of the Company, not the Company.

    Also don't be slack on due diligence, which given the failure to register with SARS might be a challenge. VAT returns are a powerful clue...
    The trouble with opportunity is it normally comes dressed up as work.

    Alcocks Electrical Services | Alcocks Pest Control & Entomological Services

  5. #5
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    True that, buying the business and not the company is very a prudent idea. But you need to agree on SARS amounts and factor that into the deal.
    Those legal issues will be haunting you because in the event of an unfavorable outcome the business assets may be attached .

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    I agree with the guys. Buy the business but not the legal entity. Form your own company name.

  7. #7
    Silver Member Greig Whitton's Avatar
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    I concur that, given the circumstances described by OP, it sounds far more prudent to buy the business than the company. However, it is worth noting that buying a company does sometimes have advantages over simply purchasing the assets:

    * Valuable intangible assets (e.g. brand, goodwill, reputation, licences, permits) are retained.
    * Important contractual agreements (e.g. leases, service level agreements) are preserved and don't need to be re-negotiated / novated.
    * Land / property used by the business but owned by the company can be retained (thus, avoiding potentially expensive transfer costs).

    Founder of Evergrow - Helping South African business owners grow their business without the growing pains

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