Can you sell a business that is losing money?

Will anyone buy a business that is not profitable?

Yes, and more often than owners expect. A buyer is not buying your last income statement. It is buying a future: customers it can serve, a product it can sell, a licence it could not get quickly, a team it needs, equipment it would otherwise have to buy. If it can see how to turn those into profit, the current loss is a reason to pay less, not a reason to refuse.

What the loss does change is the price and the risk the buyer will accept. A profitable business is valued on its earnings. A loss-making one is valued on its assets, its revenue or its strategic value, and the seller is more likely to be asked to carry part of the risk through deferred payments. That is why it matters how you explain the loss.

How do buyers read a loss?

Buyers sort losses into three groups, and the group decides the price.

• One-off losses. A legal dispute, a failed project, a bad debt, a one-time restructure. A buyer will add these back to the earnings if you can prove they will not repeat.
• Fixable losses. The business has a cost problem, one unprofitable contract or customer, or an owner paid far above the market rate. The buyer will value the business as it would run under better management, and will pay for part of that improvement.
• Structural losses. Revenue that cannot cover the cost of delivering it, a shrinking market or a product nobody wants. A buyer will pay for assets and customers only, or walk away.

The difference is easiest to see in numbers. This is an illustration, not a valuation of any real business, and the multiples are for the example only.

• A distribution company has revenue of R12m and a reported operating loss of R0.6m before interest, tax and depreciation.
• The owner draws R0.5m more than a manager would cost. Add that back.
• A one-off legal dispute cost R0.3m. Add that back.
• One contract lost R0.4m this year and has already been ended. Add that back.
• Adjusted earnings are therefore R0.6m positive (−R0.6m + R0.5m + R0.3m + R0.4m = R0.6m).
• A buyer using a multiple of three to four times earnings, purely for the example, values the business at about R1.8m to R2.4m. A buyer who sees only the reported loss values the stock and equipment, which may be less.

The seller who can document each adjustment gets the first number. The one who cannot gets the second. Our valuation guide explains how these adjustments and multiples work.

Who buys a loss-making business?

• Competitors and strategic buyers. They can cut the costs you cannot and add your customers to their own base. They are usually the best buyers for a business that is losing money, and the ones to approach first, carefully, under a non-disclosure agreement.
• Turnaround and special-situation investors. They buy a business at a low price, fix it and sell it. They move fast and expect a deep discount. See our guide to turnaround specialists.
• Asset buyers. They want the equipment, stock, property or customer book, not the company. This is an asset sale, and what is left behind remains with you. See shares or assets.
• Management. A team that believes it can fix the business may buy it, usually with deferred payment. See management buyouts.

To widen the field, read how to find a buyer for your business, and plan how you will keep the sale confidential. Suppliers, staff and customers react badly to news that a loss-making business is for sale.

What South African rules change when the business loses money?

These are general points, not advice. The right answer depends on your company’s facts.

• Solvency and directors’ duties. Under the Companies Act 71 of 2008 a company is “financially distressed” if it is reasonably unlikely to pay all its debts as they fall due over the next six months, or reasonably likely to become insolvent over the same period. Directors must not carry on the business recklessly or with intent to defraud, and may be personally liable if they do (section 22). If your company is in that position, a quiet sale may not be an option, and business rescue or another formal route may be safer. Read options when a business is in financial distress before you approach buyers.
• Employees. When a business is sold as a going concern, section 197 of the Labour Relations Act transfers the employees to the buyer automatically, on terms that are on the whole not less favourable than before, and the seller and buyer can both be liable for what accrued before the transfer. It does not usually apply to a plain sale of shares, where the employer stays the same. A buyer will price this in, and a dismissal because of the transfer is automatically unfair.
• VAT. A sale of a business as a going concern can be zero-rated for VAT if the conditions are met: it is an enterprise, or a part capable of separate operation, that will still be earning income on the transfer date; the assets needed to run it are sold with it; the buyer is a registered VAT vendor; and the sale agreement says in writing that it is a going concern and that the price includes VAT at 0%. If a condition is missed, the sale is standard-rated and the seller may owe the tax, interest and penalties. Keep the SARS paperwork.
• Do not count on the assessed loss. A buyer cannot assume that your accumulated tax loss will carry over. Section 103(2) of the Income Tax Act can disallow an assessed loss where control of the company changes for the purpose of using it. Ask a tax practitioner before you present it as an asset.
• Your own suretyships. If you signed personal guarantees for the company’s debts, selling the business does not release you. Ask the buyer and the lender to replace or release them as a condition of the sale.
• Creditors and SARS. Outstanding tax and trade debts do not disappear. In a sale of assets they stay with the company; in a sale of shares the buyer takes them on and will price them. Agree early who settles what.

Even a loss-making business can show a taxable gain on goodwill. If you are over 55, check the small business exclusion.

What if nobody will pay what you need?

You have four options. Fix first and sell later: spend six to twelve months removing the cause of the loss, because a clean year before a sale can change the price. Sell the parts: the customer book, the equipment or one division may sell when the whole does not. Merge with a competitor or supplier that can share costs. Or wind down in an orderly way before the company’s position gets worse, which protects you as a director. Which is right depends on the cash you have left and the six-month test above, so take advice early. The sooner you ask, the more options you keep.

Sources. Companies Act 71 of 2008, sections 22 and 128 (financial distress); Labour Relations Act 66 of 1995, section 197, as summarised by MJ Kotze Inc, Section 197 employees; SARS, Disposal of an enterprise or part thereof as a going concern (Interpretation Note 57); Income Tax Act 58 of 1962, section 103(2); Caban’s own M&A and valuation guides linked above.