A sale of business or shares usually follows a predictable pattern. In many cases, the seller agrees to transfer business assets or shares before receiving final payment, which is referred to as a ‘deferred payment’ or ‘deferred loan’. A seller may agree to transfer ownership on a deferred payment basis for various reasons, including a negotiated increased amount for the assets on offer, an increase in BBBEE scorecard points for the purchaser, difficulties experienced by the purchaser in raising funds, or the earn-out model through which the seller receives higher payments on meeting certain criteria.
Sellers should however be wary of agreeing to such deferred payment terms, and if they do agree to such terms, they should ensure that appropriate clauses are included into the sale purchase agreement and that they hold security for their deferred payment rights.
A deferred payment could be regarded as an interest free loan, which in practice is often made without any corresponding security provided by the purchaser. Given the loan nature of the obligations of the purchaser, it is always recommended that the seller include standard loan terms into the acquisition documents, including clauses providing for:
Most importantly, the seller should first and foremost always conduct a due diligence on any potential purchaser who is requesting a deferred payment structure to ascertain whether the purchaser has the financial means to pay the deferred payment.
It is recommended that sellers who accept deferred payment terms when selling their assets understand the loan nature of such obligations. To address the risk that this presents, the seller should ensure that they have considered all security options available to them and include appropriate loan terminology into the sale purchase agreements to adequately protect their interests in the event of a default and to provide greater protection to the seller.
Robyn has a BA LLB (cum laude) and was admitted as an attorney in 2011 after having completed her articles at ENS. She advanced to senior associate level in ENS’ corporate department before moving to Deloitte and then Coast to Coast Capital. Robyn joined Caveat in 2020 specialising in M&A and banking and finance work.
* For vendor finance transactions where interest is charged to the purchaser, read Robyn’s article on the effects of the National Credit Act on these transactions.