It’s a Gift!
The recent transaction where the Gupta Company Oakbay Resources sold their media interests in ANN7 and New Age to be paid by “VENDOR FINANCE” made me decide to share my thoughts on why this is simply a gift and not a sale.
Vendor Finance by definition is where the purchase price as agreed between buyer and seller will be paid by the business from profits AFTER the transaction has occurred.
As a broker and provider of Business Valuations I often receive calls from interested parties who require a valuation for the purpose of “selling” some or all of his shares to employees, a partner, an intended B-BBEE transaction or even to a friend or family member. Upon investigation it is often found that the buyer has very little or no own funds to pay for the transaction. The structure contemplated is that of the transfer of shares paid by future profits generated by the business… with interest nogal!
The golden rule of Business Broking has always been: ON the Effective Date the benefits and risks of the business transfer to the Purchaser and the benefits and risk of the purchase price transfer to the Seller. Paying the purchase price with interest obviously helps the equation in that the benefit of the selling price accrued ON the date that the business has transferred.
BUT: the risk has not transferred from the Seller to the Purchaser. Should the business therefore fail for whatever reason before the Seller received his purchase price with interest it will be at the cost of the Seller. What makes this dilemma even worst when you contemplate a transaction of this nature is that the Seller also potentially lose all or at least some of the control he has over the business.
This may be somewhat more bearable if the Purchaser can come up with a large percentage of the purchase price and 20% or 30% becomes financeable by the business. The risk reduces dramatically.
The solution is simple. If no Financial Institution is prepared to forward the required funds you shouldn’t either. The risk is simply too high. When the Purchaser brings the cash on the Effective Date then the risk associated with owning a business has also properly transferred from the Seller to the Purchaser.
Congratulations to Mr. Mzwanele Manyi for the gift received from Oakbay. This is clear proof that they are not only receiving but also giving!
If you are in doubt about a transaction you are currently negotiating please feel free to contact Nico at 083 441 3575.