1. The Core Difference
Every business acquisition in South Africa ultimately reduces to a single structural question: are you buying the company itself, or are you buying what the company owns? The answer determines your tax exposure, your inherited liabilities, your regulatory obligations, and the complexity of the transaction from start to finish.
Share Sale
The buyer acquires the shares in the target company from its existing shareholders. The company itself continues to exist — all its assets, liabilities, contracts, employees, licences, and relationships remain intact inside the legal entity. Only the ownership changes hands.
- →Entire company (including all historic liabilities) transfers
- →Contracts and licences remain in the company — no novation required
- →Employees transfer automatically under s197 of the LRA
- →Seller proceeds taxed as CGT (generally more favourable)
Asset Sale
The buyer acquires specific assets and liabilities from the target company. The company itself remains in existence — the buyer gets what was agreed (plant, stock, IP, goodwill, contracts), and the selling company retains everything else.
- →Buyer cherry-picks assets and liabilities to acquire
- →Contracts and leases require novation or cession
- →Employee transfer depends on whether s197B of LRA applies
- →Seller proceeds generally taxed as income (less favourable)
Neither structure is inherently superior. The optimal choice depends on the parties' respective tax positions, the nature and condition of the target's liabilities, the regulatory environment, and what each party is trying to protect or avoid. Understanding the differences in granular detail is what allows your legal and tax advisors to structure a deal that serves your interests rather than the other side's.
2. Comprehensive Comparison
The table below compares share sales and asset sales across the twelve dimensions that matter most in South African M&A transactions.
Share Sale vs Asset Sale — Key Differences
| Factor | Share Sale | Asset Sale |
|---|---|---|
| What transfers | Shares in the company — the buyer steps into the shareholders' shoes | Specific identified assets and agreed liabilities only |
| Liabilities | All historic and contingent liabilities transfer with the company — disclosed or not | Buyer takes only the liabilities expressly assumed in the agreement |
| Tax (seller) | CGT — inclusion rate 40% for companies (effective 36%), 40% for natural persons (effective 18%) | Income tax on recoupments and trading profits; CGT on capital assets — generally less favourable |
| VAT | No VAT on share transfers — shares are exempt under the VAT Act | VAT applies unless going concern exemption (s11(1)(e)) is claimed — strict requirements apply |
| Transfer duty | No transfer duty on share transfers | Transfer duty payable on any immovable property included in the asset package |
| Employees | Automatic transfer under s197 of the LRA — same terms and conditions | S197B may apply if whole or part of undertaking transfers; otherwise negotiated |
| Contracts & leases | All contracts remain in the company — no novation required | Novation, cession, or counterparty consent required for each contract |
| Regulatory approvals | Licences remain in the company — confirm whether change of control triggers review | Licences remain with selling company — buyer must apply for new licences |
| Due diligence | Full company history — all records, historic liabilities, and skeletons in the cupboard | Limited to selected assets — cleaner but less information on the business context |
| Buyer preference | Buyers typically prefer asset sales — avoids inheriting historic liabilities | Buyers can ring-fence liability exposure and acquire only what they want |
| Seller preference | Sellers typically prefer share sales — cleaner exit, CGT treatment, no residual company | Sellers may prefer where the company has significant retained liabilities to keep |
| Negotiation leverage | Seller has leverage if the business has clean balance sheet and strong contractual rights | Buyer has leverage — can exclude problematic assets and cap liability exposure |
4. Asset Sale — VAT Going Concern & Transfer Duty
In an asset sale, the buyer acquires a defined package of assets and assumes specified liabilities. The selling company retains its legal existence and everything not sold. This structure gives the buyer surgical control over what it acquires — but creates significant complexity around tax, contract novation, and employee transfers.
VAT Going Concern Exemption — s11(1)(e) VAT Act
The most significant VAT relief available on an asset sale is the going concern exemption under section 11(1)(e) of the Value-Added Tax Act 89 of 1991. Where the exemption applies, the supply is zero-rated — no VAT is payable on the transaction, eliminating the buyer's cash flow cost of funding VAT pending its input tax refund.
All of the following requirements must be satisfied:
- The enterprise (or an independent part thereof) is disposed of as a going concern
- The assets are disposed of as part of the enterprise — not merely individual assets in isolation
- The supply is made in terms of a written agreement
- Both the seller and the buyer are registered (or required to be registered) VAT vendors at the time of supply
- The agreement expressly records that the supply is of a going concern
- The enterprise is capable of separate operation by the buyer — all necessary assets must transfer
SARS Alert
SARS scrutinises going concern claims carefully. If a requirement is not met, the seller remains liable for output tax at the standard rate (currently 15%), and the buyer may not be entitled to claim input tax if the agreement was not correctly structured. Legal advice before signing is essential.
Transfer Duty on Immovable Property
Where the asset package includes immovable property, transfer duty is payable under the Transfer Duty Act 40 of 1949, calculated on the higher of the purchase price and the market value of the property. Transfer duty rates range from 0% (on properties below R1 100 000) to 13% (on the portion above R2 250 000). This is a significant additional cost that does not arise in a share sale.
Where a transaction involves both a going concern asset sale and immovable property, careful structuring is required — the immovable property component may attract transfer duty while the balance of the business qualifies for the going concern VAT exemption. The agreement should apportion the purchase price between immovable and other assets for this reason.
Buyer Advantages
- •Selects only the assets it wants — avoids problematic liabilities
- •Step-up in tax base of assets — higher depreciation going forward
- •No inherited SARS exposure (PAYE, VAT, income tax arrears)
- •No historic employment disputes or CCMA matters
- •Cleaner balance sheet from day one
Seller Disadvantages
- •Proceeds generally taxed as income, not CGT — higher tax rate
- •Recoupment of depreciation taxed as income in the year of sale
- •Company continues to exist with residual liabilities — must be wound up separately
- •Contract novation creates risk of counterparty refusal or renegotiation
- •VAT obligations more complex — going concern requirements must be met
5. Earn-Outs
When buyer and seller cannot agree on a purchase price — typically because the seller believes in future growth that the buyer is unwilling to pay for upfront — an earn-out arrangement bridges the valuation gap. The buyer pays a base amount at closing, with additional consideration contingent on the business achieving agreed performance milestones over a defined post-closing period.
Performance Milestones
Earn-out payments are typically tied to financial metrics such as EBITDA, revenue, gross profit, or net profit over one to three years post-closing. The agreement must precisely define the metric, the measurement period, and who prepares and audits the earn-out accounts. Disputes over accounting treatment are the most common earn-out litigation category.
Accounting Disputes
Sellers are typically concerned that the buyer will manage the business in ways that suppress earn-out metrics — by delaying revenue recognition, front-loading costs, or changing accounting policies. The earn-out agreement should specify: the accounting policies to be applied, restrictions on the buyer's conduct of the business during the earn-out period, and an independent expert determination mechanism for disputes.
SARS Treatment of Earn-Outs
The tax treatment of earn-out payments depends on their characterisation. If the earn-out is conditional on the seller remaining employed post-closing, SARS may treat the payments as remuneration (subject to PAYE) rather than as additional consideration for the shares or assets. Earn-outs that are genuinely contingent on business performance — and not on ongoing employment — are more likely to be treated as capital receipts subject to CGT.
When Earn-Outs Make Sense
Earn-outs are most appropriate where the business is owner-dependent (and the seller is staying on post-closing), where the business is in a growth phase with uncertain but plausible upside, or where the parties cannot agree on a risk-adjusted valuation. They add transaction complexity and create ongoing obligations between buyer and seller — they should be avoided where a clean break is the priority.
6. Mixed Structures
Not every acquisition is a pure share sale or a pure asset sale. Complex transactions sometimes use hybrid structures that combine elements of both — or that restructure the target before closing to achieve a more favourable outcome for one or both parties.
Pre-Sale Hive-Down
The target company transfers the business it wants to sell into a new subsidiary. The buyer then acquires the shares in the subsidiary — getting a share sale's clean contract and licence continuity — without inheriting the parent company's historic liabilities. The parent company retains any liabilities the buyer does not want.
Selective Asset + Share Sale
Some transactions involve an asset sale of specific identifiable assets (property, plant) combined with a share sale of the operating entity. This is sometimes used where the buyer wants the operating company's contracts and licences but does not want to acquire specific real property that the seller intends to retain.
Management Buyout Structures
In management buyouts, management often acquires shares in a new holding company (Newco) that then acquires the target via either a share or asset acquisition. The funding structure — debt, equity, preference shares — is designed to optimise cash flow for debt service and to align management incentives.
BEE Transaction Structuring
Transactions with a BEE component often involve a hybrid structure — BEE partners acquire equity at the holding level (share sale), while the underlying business is restructured to separate BEE-owned operations from non-BEE operations, each reflecting the appropriate ownership profile for licensing and procurement purposes.
Mixed structures require careful coordination between corporate law, tax, and employment law advisors. They are typically worth the additional complexity only in transactions of meaningful size — the legal and structuring costs must be weighed against the tax and liability benefits achieved.
7. Impact on Employees
The Labour Relations Act 66 of 1995 contains specific provisions governing the transfer of employment in business acquisitions. Getting this wrong exposes both buyer and seller to significant liability — unfair dismissal claims, CCMA arbitrations, and potential automatic reinstatement orders.
Section 197 vs Section 197B — LRA Employee Transfer Rules
| Factor | S197 (Share Sale / Going Concern Transfer) | S197B (Insolvent Business Transfer) |
|---|---|---|
| Trigger | Transfer of a business or part of a business as a going concern | Transfer of a business by an employer that is insolvent or in business rescue |
| Automatic transfer? | Yes — employees transfer automatically on the same terms and conditions | Transfer may occur on different terms — new employer not required to replicate existing terms |
| Continuity of service | Full continuity — prior service counts for all purposes including retrenchment and leave | Partial — prior service acknowledged but terms may be renegotiated |
| Retrenchment risk | Seller cannot retrench employees to facilitate the sale — operationally justified only | Retrenchment prior to transfer is possible where business is insolvent |
| Disclosure obligations | Both seller and buyer must disclose transfer to affected employees and unions before the transfer | Disclosure required — may be more limited given insolvency urgency |
Retrenchment Risk in Asset Sales
In a pure asset sale where the going concern provisions of s197 do not apply (because not all employees or the entire business unit transfers), employees who are not transferred remain employed by the selling company. If the selling company then has no business to conduct, those employees may face retrenchment. This creates s189 retrenchment obligations — consultation, disclosure, and severance pay. The sale agreement should clearly allocate responsibility for any retrenchment costs between buyer and seller.
8. Competition Act Implications
Both share sales and asset sales can trigger mandatory merger notification obligations under the Competition Act 89 of 1998. The structure of the transaction is irrelevant — what matters is whether the transaction results in a change of control over a firm or a part of a firm, and whether the combined turnover or assets of the parties exceed the prescribed notification thresholds.
When Notification Is Required
A merger (defined broadly to include both share sales and asset acquisitions) must be notified to the Competition Commission if the combined annual turnover or assets of the acquiring and target firms exceed the prescribed thresholds. As at 2024, a small merger is notifiable if the combined turnover exceeds R600m OR if the target's turnover/assets exceed R100m. Large mergers (combined > R6.6bn) are subject to mandatory prior notification and cannot be implemented until approved.
Asset Acquisitions of Business Units
A common misconception is that an asset sale does not trigger Competition Act obligations. The Act defines a "merger" to include the acquisition of assets of a firm that enables the acquirer to control that firm or its business activity. Acquiring a complete business division — even as assets — can constitute a merger subject to notification. The Competition Commission has confirmed this position in several decisions.
Timing and Conditions Precedent
Where merger notification is required, the transaction cannot close before approval is obtained. This typically adds 20 to 40 business days to the timeline for unconditional approvals, and significantly longer where the Commission raises competition concerns and imposes conditions. Merger approval should be structured as a condition precedent in the sale agreement, with a longstop date to allow parties to walk away if approval is unreasonably delayed.
9. Tax Planning
The tax consequences of the chosen deal structure are typically the most significant financial variable in the transaction. Both buyers and sellers should model the after-tax proceeds and costs under each structure before settling on a preferred approach.
CGT vs Income Tax on Asset Sales
In an asset sale, the tax treatment depends on the nature of each asset sold:
- Trading stock:Income tax — proceeds less cost included in gross income
- Depreciable assets (plant, vehicles):Recoupment of tax depreciation (income tax) + CGT on any proceeds above original cost
- Goodwill:CGT — treated as a capital asset; 80% inclusion rate for companies
- Intellectual property (self-created):Generally income tax — IP developed in the course of trade is a revenue asset
- Immovable property:CGT on capital gain; recoupment on any buildings on which depreciation was claimed
Small Business Corporation Relief
Where the seller qualifies as a Small Business Corporation (SBC) under section 12E of the Income Tax Act — broadly, a close corporation or private company with gross income below R20m and natural person shareholders — reduced tax rates apply. SBC shareholders also benefit from additional CGT exclusions on the disposal of active business assets. This can materially improve the after-tax position on a share or asset sale for qualifying sellers.
Group Restructuring Relief
Sections 42 to 47 of the Income Tax Act provide roll-over relief for certain intra-group asset-for-share and amalgamation transactions. These provisions allow South African groups to restructure without triggering immediate CGT — the CGT exposure is rolled over to the acquiring entity and realised only on an eventual arm's length disposal. Professional tax advice is essential before invoking these provisions.
SARS General Anti-Avoidance Rule (GAAR)
Section 80A to 80L of the Income Tax Act contains a broad anti-avoidance rule that empowers SARS to disregard any arrangement that lacks commercial substance or whose primary purpose is the avoidance of tax. Structuring a transaction primarily (or solely) to achieve more favourable tax treatment — without genuine commercial justification — creates GAAR exposure. Deal structures should be driven by genuine business rationale, with tax efficiency as a secondary (not primary) objective.
10. Which Structure Is Right?
There is no universal answer. The right structure depends on the interplay of multiple factors specific to your transaction. The following decision framework identifies the key questions to resolve before settling on a structure:
How clean is the target's balance sheet and liability position?
Share Sale Favoured When:
Share sale viable if liabilities are fully disclosed and quantified — warranties and indemnities can manage the risk
Asset Sale Favoured When:
Asset sale strongly favoured where the target has undisclosed, contingent, or disputed liabilities
What is the seller's tax position?
Share Sale Favoured When:
Share sale — CGT treatment is almost always more favourable than income tax on asset sale proceeds
Asset Sale Favoured When:
Asset sale may be preferred where the seller has assessed losses to offset income, or where the target has low-value assets with minimal recoupment
How important are the target's contracts and licences?
Share Sale Favoured When:
Share sale — contracts and licences remain in the company with no novation required
Asset Sale Favoured When:
Asset sale is viable only if the buyer can obtain counterparty consent to novate material contracts
What is the transaction timeline?
Share Sale Favoured When:
Share sale — typically fewer conditions precedent and a faster path to closing
Asset Sale Favoured When:
Asset sale — more conditions precedent (novations, regulatory re-applications) typically extend the timeline
Are there immovable properties in the asset base?
Share Sale Favoured When:
Share sale — no transfer duty, no conveyancing process
Asset Sale Favoured When:
Asset sale — transfer duty and conveyancing add cost and complexity; going concern VAT exemption may assist on the balance
The Negotiation Reality
In practice, sellers almost always prefer share sales and buyers almost always prefer asset sales — for tax and liability reasons respectively. The structure that is ultimately agreed reflects the relative negotiating power of the parties. A seller with a highly desirable, clean business can insist on a share sale; a buyer acquiring a distressed or liability-laden business can insist on an asset deal.
Price adjustments are often used to bridge the structural preference gap: a buyer may agree to a share sale at a reduced price to compensate for the liability risk assumed, or a seller may accept a lower after-tax return on an asset sale in exchange for a higher headline price. Your attorney and tax advisor should model these trade-offs before you enter price negotiations.
11. Due Diligence Differences
The structure of the transaction fundamentally determines the scope and focus of due diligence. A share sale buyer must investigate the entire company — its history, liabilities, and regulatory standing. An asset sale buyer focuses on the specific assets being acquired.
Share Sale Due Diligence
- •Full corporate history — MOI, share register, shareholder resolutions
- •All financial statements for prior years — looking for hidden liabilities
- •Complete tax compliance review — SARS correspondence, assessments, disputes
- •All material contracts — including change of control provisions
- •Employment records — all employees, union agreements, pending CCMA matters
- •Litigation history — all claims, threatened claims, and regulatory investigations
- •Environmental compliance and any historical contamination
- •IP ownership — ensuring IP is held by the company, not by founders personally
Asset Sale Due Diligence
- •Title and ownership of each specific asset to be acquired
- •Encumbrances, liens, and security interests over acquired assets
- •Condition and valuation of plant, equipment, and stock
- •Novation prospects for key contracts — counterparty consent likelihood
- •Regulatory re-application requirements for licences and permits
- •Employees to be transferred — their terms and pending disputes
- •VAT going concern compliance — all conditions satisfied?
- •Transfer duty assessment on any immovable property included
Due diligence findings directly influence the transaction structure and the warranty schedule. Issues discovered during due diligence — such as undisclosed SARS assessments, pending litigation, or defective title to assets — become either deal-breakers, price adjustment triggers, or the subject of specific indemnities in the sale agreement. The scope of due diligence should always be agreed before the process begins, with clear protocols for how material findings are to be handled.
Structuring Your Business Acquisition
The share sale vs asset sale decision is consequential — it affects your tax position, liability exposure, transaction timeline, and regulatory obligations. MJ Kotze Inc advises on business acquisitions and disposals across all sectors, including deal structuring, due diligence, sale agreements, and post-transaction regulatory compliance.
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