The purchase agreement: where your protection actually lives

Asset sale or share sale: the decision everything else hangs on

There are two ways to buy a business. You can buy the company that owns it, by purchasing its shares. Or you can buy the business out of the company, by purchasing its assets: the equipment, the stock, the goodwill, the customer relationships, the name. Every clause that follows in the agreement is shaped by which of these you chose, and the choice has consequences across three separate dimensions.

The last row is the point. Sellers push share sales because the proceeds attract capital gains treatment in their hands and the exit is clean: they hand over the shares and walk away from the history. Your default as a buyer is an asset sale, precisely because it lets you leave that history behind. The legitimate exception is the business whose value sits in contracts or licences that cannot practically move. If that is what you are buying, a share sale may be the only workable structure, and the answer is not to avoid it but to price it properly and build the warranty and indemnity protection that a full inheritance of history demands.

The two traps that follow the assets

An asset sale does not mean you choose everything you take. Two statutory mechanisms attach to the business itself and follow it to you regardless of what the agreement says. Both catch buyers who assumed the asset structure had insulated them.

Section 197: the employees come with the business

Section 197 of the Labour Relations Act applies whenever a business is transferred from one employer to another as a going concern. On that transfer, you are automatically substituted as the employer under every employment contract that existed immediately before it. You do not get to interview the staff and pick. They arrive on their existing terms, which may not be less favourable on the whole, and they arrive with their history: anything the old employer did before the transfer, including dismissals and unfair labour practices, is treated in law as having been done by you.

Note the asymmetry with the structural decision above. Section 197 does not apply to a share sale, because the employer never changes; the employees simply stay where they are, along with everything they are owed. It is the asset sale, the structure you chose to escape historic liability, that triggers the automatic transfer.

Contracting out is technically possible under s197(6), through an agreement reached with the employees themselves after a consultation process mirroring a s189 retrenchment consultation. Treat this as a specialist exercise with high procedural risk, not a clause your attorney inserts. Where the process fails, the resulting dismissals are automatically unfair under s187(1)(g), with compensation of up to 24 months' remuneration.

Two joint-liability provisions matter to your negotiation. Under s197(8), the old employer remains jointly and severally liable with you for 12 months after transfer for leave pay, severance and amounts owing on operational-requirements dismissal or liquidation, unless compliance is shown. Under s197(9), old and new employer are jointly and severally liable for any claim arising from a term or condition of employment that predates the transfer. Joint liability means the employee can choose to pursue you, and you then recover from the seller if you can.

Section 34: the creditors can take back what you paid for

Section 34 of the Insolvency Act is the trap almost no first-time buyer has heard of. A trader who transfers a business, its goodwill, or goods or property forming part of it outside the ordinary course of business must publish notice of the transfer in the Government Gazette and in two issues each of an English and an Afrikaans newspaper circulating in the district, not less than 30 and not more than 60 days before the transfer.

Do not assume the section only bites when a seller looks distressed. "Trader" is defined broadly in s2, and outstanding trade debts are enough to keep even a non-trading entity within the definition, a point confirmed in Paterson v Kelvin Park Properties CC (1998). The one clean exception is a disposal under an approved business rescue plan, per Reiscor Two v Anheuser-Busch InBev Africa. There is also a second-order effect sellers dislike: publication accelerates the seller's liquidated liabilities, which become immediately due on demand. Expect a seller with cash-flow strain to resist publication for exactly that reason, and treat the resistance as information.

The protection spectrum

Every mechanism in a purchase agreement sits somewhere on a spectrum that runs from easy to obtain but weak, through to hard to negotiate but genuinely protective. Understanding the spectrum tells you what to fight for and what a concession actually costs.

Two obligations close out this section, and neither is optional. A restraint of trade stops the seller opening across the road with the customer relationships you just paid for; goodwill without a restraint is a rental, not a purchase. It must be reasonable in area, duration and scope to be enforceable, which is a drafting exercise for your attorney, not a template clause. And handover obligationsput the seller's transition period in the contract: duration, availability, customer and supplier introductions, and what the seller is paid for it, if anything. A seller's enthusiasm for handover is at its lifetime maximum the week before payment. Contract it while that is still true.

The tax mechanics of the deal

An asset sale of a going concern can be zero-rated for VAT under s11(1)(e) of the VAT Act, meaning VAT at 0% instead of 15% on the price. SARS Interpretation Note 57 sets out six requirements, and all six must be met:

Notice how much of that list is drafting. Three of the six requirements are written agreements between the parties, which means zero-rating fails most often not because the business was not a going concern but because the agreement never said the required things. The purchaser-registration requirement is the other common failure: leave your VAT registration too late and requirement two collapses on its own.

A share sale sits outside this regime entirely. The transfer of shares is a financial service, exempt from VAT under s12(a), and attracts securities transfer tax instead: 0,25% of the higher of the consideration or the market value of the shares. The company is liable for the STT and may recover it from the person acquiring the shares, with declaration via SARS e-STT within 30 days. Whichever structure you use, require current tax clearance on the seller as a condition. A seller who cannot produce it is telling you something due diligence should already have surfaced.

Reading the seller's draft

The first draft usually comes from the seller's attorney, and it is written for the seller. None of the moves below is improper. All of them shift risk to you, and the skill is recognising them before you sign rather than litigating them after.

Briefing your attorney

Come to the first meeting with the deal structure question already framed and your due diligence findings organised into a list of risks you want allocated. That briefing quality changes both the advice you get and what it costs, because attorneys bill time, and time spent working out what you want is billed the same as time spent protecting you.

On cost, be realistic about the market. Experienced commercial attorneys in South Africa charge broadly between R1,500 and R4,000 per hour depending on seniority and firm, with senior transaction specialists above that. A properly negotiated sale of business agreement, from structuring advice through drafting, disclosure review and signature, is plausibly a 20 to 40 hour engagement, which puts the realistic budget between roughly R40,000 and R150,000 depending on deal complexity and how contested the negotiation gets. Treat those figures as indicative and get a fee estimate upfront. Then hold them against the deal: on a R3 million purchase, proper transaction work costs 2 to 4% of the price, and a single missed s34 publication or failed zero-rating costs multiples of the entire fee. This is the wrong place in the deal to economise.

The harder problem is that most general practices do conveyancing and commercial odds and ends, not transactions, and the difference only shows when something goes wrong. A few questions separate the two quickly:

The Competition Act, briefly, and what comes next

Merger notification thresholds under the Competition Act changed on 1 May 2026, and most published guidance still carries the old figures. Under the current thresholds, a deal is an intermediate merger, requiring mandatory notification to the Competition Commission, only where the combined turnover or assets of the parties reach R1 billion or more and the target's turnover or assets reach R200 million or more, with a filing fee of R220,000. Large mergers sit at R9,5 billion combined and R280 million target, with a R735,000 filing fee. The business you are buying almost certainly falls below both limbs of the lower threshold, which makes the deal a small merger: no mandatory notification, though the Commission retains the power to call a small merger in within six months of implementation on competition or public interest grounds. For the typical owner-managed business purchase, this is a paragraph in your attorney's advice, not a workstream.

The agreement allocates the risk. It does not pay the price. How the purchase is actually funded, why seller finance is both common and quietly protective, and the working capital trap that catches buyers who thought the purchase price was the cost of the purchase: that is the next page.