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POTENTIAL RISKS WHEN BUYING A BUSINESS – BUSINESS DEVELOPMENT
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| Having identified some of the potential benefits, let’s take a closer look at some of the risks associated with buying a business.
LOCATION: The business could be located in the wrong premises, and new premises might be required to ensure ongoing success.
LEASE: The rental may not be market related and escalation per annum too high. The lease could also contain very negative terms & conditions.
PROBLEMS AND LEGACY ISSUES: You may be taking over major problems that the previous owner has created and/or has not told you about. E.g. a key customer leaving!
When looking for potential business there are a number of ways you can source prospects. You could:
Don’t buy what the broker wants to sell you just for the sake of buying a business. Look for and get the business you want and deserve. It probably won’t be 100% of what you want, but then why would you buy a business that you do not feel you can grow and develop?
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Leasing vs. Buying – Corporate Finance
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| An issue that needs to be considered right at the beginning of any decision to purchase assets is whether to buy or lease them. If you decide to buy, then also consider use of debt to finance the purchase.
Ideally, businesses should only buy appreciating assets and lease depreciating ones. Buying is best if you will be able to make use of the asset for longer than what the ‘rental’ period would cover. However, if buying the asset would deplete the company’s cashflow, then buying becomes unattractive.
Further, if cashflow is not adequate and working capital is critical, then financing the asset purchase using debt must be considered.
Asset finance can be considerably complex and any mistakes made in choice of available options can cost the company in terms of profitability as well as balance sheet strength.
The most important forms of asset finance are:
· Installment sale – (also know as Hire Purchase), refers to a credit agreement in terms of which goods are sold by the bank to a customer over a negotiated period of time, agreed interest rate and installments of periodical payments. Ownership of the goods or assets pass to the customer after payment of last installment (suitable for M/Vehicles, Furniture & Fittings and Equipment)
· Rental – (Operating Lease), provides the customer with uninterrupted use of an asset, rather than ownership (suitable for computer equipment, photocopiers and fax machines, generally assets which are replaced on a regular basis)
· Finance Lease – Like with Operating Lease, provides the customer with uninterrupted use of an asset, rather than ownership. The customer has the option to take ownership or return the asset to the bank at the end of the period. Difference compared to Rental mostly lie in the treatment of VAT (balloon and stepped up payments can be arranged to suit customer company cashflow.)
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Security around VAT Registrations and administration – Taxation
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| The South African Revenue Service has recently implemented a range of additional security measures to safeguard the VAT system from attempted abuse and fraud.
The new measures include more stringent verification of applications for VAT registration, investigations of existing VAT vendors who are under the turnover threshold and a review of risk measures for refunds. South Africa’s tax system is based on self-declaration and depends to large extent on the integrity of taxpayers to make full, accurate and honest disclosure and pay all tax that is due. The vast majority of VAT vendors are compliant and SARS thank them for making their fair contribution to the fiscus. However, monitoring of VAT registrations and refunds over the past six months by SARS has revealed a disturbing increase in attempted fraudulent registrations and other attempts to defraud the VAT system
As a result, applications must be accompanied by proof of ID, bank particulars and physical address of the business. Where applicants are unable to visit a SARS branch to apply in person or to send a legal representative, applications may be done via post but will require additional verification measures before activation. Where necessary, inspections of business premises will take place to check trading activity before activation of VAT accounts. SARS is also considering implementing additional verifications including the use of biometric tests (fingerprinting of applicants) for VAT and other tax registrations. In South Africa and internationally, the use of biometrics as a safety mechanism is growing in use and SARS is investigating this as a longer term solution.
Value-Added Tax (VAT) is a tax charged and collected by vendors on the sale of most goods or services. It is also charged on goods and some services, imported from places outside South Africa.
VAT is charged at a standard rate, which is 14%, and is paid each time a taxable supply is made. For certain goods and services, a special rate of 0% VAT (zero-rate) is applied, while a limited range of goods and services are exempt. Generally, businesses that are registered as vendors charge VAT on every sale of standard-rated goods and services (output tax) and claim credits for the VAT included in the price of their business purchases (input tax). The broad effect is that businesses are not affected by VAT and the economic cost of the VAT is actually borne by the final consumer, who cannot claim an input tax deduction. Output tax less the input tax in a particular tax period equals the amount payable/refundable to/by SARS.
Compulsory registration – If you are in business and making taxable supplies (i.e. standard-rated and zero-rated supplies), the value of these supplies is your taxable turnover. You must register for VAT within 21 days if your annual taxable turnover exceeds or is expected to exceed R1m
.Voluntary registration – If your annual taxable turnover is less than R1m but more than R20k, you can apply for voluntary registration if you can meet certain other conditions as well.
Calculating your annual turnover – Your annual taxable turnover is the gross business income (not the profit), excluding any: VAT included in your sales to your customers; Exempt supplies you make; and Sales not connected with your business in South Africa.
Commissioner may refuse to register a person for voluntary registration if any of the following requirements are not met by the applicant: The person has no fixed place of residence or business in South Africa; or Does not keep proper accounting records; or Has not opened a banking account in South Africa; or Has previously been registered as a vendor under VAT or General Sales Tax (GST) and failed to perform the duties of a vendor; or Has not met the minimum threshold requirement of R20 000 turnover for the past 12 months.
What does being registered for VAT mean? – If you are registered or required to be registered for VAT, you must – include VAT in the price of most goods and services you sell;
· keep proper VAT records and accounts;
· provide correct and accurate information to SARS;
· submit returns and payments on time;
· include VAT in your prices, advertisements and quotes;
· keep accurate accounting records for 5 years;
· produce relevant documents when required by SARS;
· notify SARS about any changes in your business, namely your address, trading name, partners, bank details and tax periods; and
· Issue tax invoices, debit and credit notes.
Adapted from “VAT – Small Vendors Guide” – SARS”
– Mwendabai –
(011 – 312 3149/ mkalaluka@iabcgroup.co.za)
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ENTERPRISE RISK MANAGEMENT
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| “Floods, Security, Breaches, Loss of Major Suppliers/ Customers and Power Cuts are all events capable of crippling a business and yet many companies are far from being prepared”.
Running a business can be risky – so what can businesses do prepare for the worst? “It all starts with getting a fundamental understanding of what risks a company faces.”
During the risk identification process, the hazards that a company faces frequently turn out to be different from the ones management expects. Companies often overlook what’s on their doorsteps. Over looking issues such as:
1) Crisis management;
2) Crisis communication.
3) Supplier going to bankrupt
4) Crime related losses
5) Employee embezzlement and pilferage
6) Malicious damage
7) Flooding and; other,
8.) Natural occurrences
Risk management is more than just identifying risk, but taking this further to managing and mitigating these risks. Companies ought to take necessary steps to protect themselves.
5 Key Tips to avert a crisis
1) Consider insurance cover; e.g. trade credit insurance, business content insurance;
2) Have an effective crisis communication plan;
3) Ensure that risks are not only identified but also managed and mitigated;
4) Tailor crisis response to minimize the impact on people, the environment, assets and reputation, and;
5) Conduct bi-annual crisis management training sessions.
– Mwendabai –
(011 – 312 3149/ mkalaluka@iabcgroup.co.za)
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2011 Message from the MC
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| The years 2009 and 2010 have been undoubtedly the toughest years for business both on the South African political and economic platform as well as internationally. Even the world cup event hosted right in our backyard was incapable of significantly mitigating the effects of the global economic meltdown.The above said, even as I would confirm at this point that several businesses both in the small/ medium and large segments have closed down (take a look at the financial distress/ receiverships & liquidations stats), an encouraging number of small businesses have survived. A few have even used the adverse economic climate to grow and excel to greater heights. Many professional argue that the survival of small/medium enterprises is due to the inherent advantage they hold arising from being owner managed and hence decision making is often very flexible and quick making them more responsive.
Whatever the case may be, I am particularly confident that the economic recovery that is already visible at this point will start filtering down into all sectors of the economy stimulating economic activity across all enterprises including small/ medium enterprises in the 2nd half of the year (2011) and we should start to see improvement in business and therefore wellbeing of most enterprises. I would like to urge all business to continue exercising discipline, managing costs, continue with marketing and sales efforts and being innovative in the adoption of business models that ensure efficient and yet effective ways of doing business. I may not be quoted, that said however, “for business that ensure survival until the 2nd part of 2011, these will most likely remain in operational existence for a relatively long time”. If there is a positive that has come out of this economic recession is that we all have been educated and re-educated around points of;
As earlier stated, from now on things can only get better so here is to wishing you a prosperous 2011. |
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SEVERE NON-COMPLIANCE PENALTIES – (Taxation)
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| Be warned, some very serious and hash SARS legislation prescribing administrative penalties for non compliance were gazette recently. These will seek to inflict serious punishment on tax payers who continuosly fail to comply.
We wish to warn all our clients and esteemed readers that this is a major business risk as the consequences may be dire and of a financial nature. In the worst case, SARS action has led to companies filing for insolvency and losing their assets and subsequently going out of business. Urgently consult your professional advisors/ Accountants as regards your level of compliance.
Note that this development merely seeks to ensure maximum possible compliance with the Income Tax Act (“ITA”), however price for non compliance would be one you do now wish to experience.
Instances of non compliance that could trigger heavy penalties:
· Failure to register as a tax payer as required by the ITA;
· Failure to submit a return and/or other documents;
· Failure to furnish Sars with required information or documents;
· Failure by a provisional tax payer to provide an estimate of taxable income as required by the ITA, and;
· Failure to inform the ‘taxman’ of a change of address.
IABC does offer full monthly Income Tax, VAT and Payroll Taxes Administration.
– Mwendabai – (011 – 312 3149/ mkalaluka@iabcgroup.co.za) |
Editorial contributions are welcome although the publisher cannot accept responsibility for unsolicited material. © Intellogic Africa Business Consulting_2011. All rights reserved. While every effort has been made by the publisher to ensure accuracy of information contained herein, the publisher and its agents cannot be held responsible for errors, or loss incurred as a consequence of reliance placed on the contents herein. The publisher advises that readers consult their financial and professional consultants before acting on any information. Further, no consideration is accepted for any editorial published. Published articles are not linked to the placement of any advertising.
Read MoreIn these times of the so called economic meltdown, certain realities hit the businesses:
· Companies experience low/ reduced Sales
· Companies experience low/ reduced growth
· Companies experience deteriorating cash flows
With all the above hitting you, you don’t want an increase in Fraud added onto it. Hence like never before ensuring sound financial and business controls is key and fundamental.
Further, retrenchments have also become a buzzword in the work place. This too if not managed handled effectively an equitably, can also increase the risk of fraud. According to research, white collar crime is real and on the increase.
The National Bargaining Council (“NBC”) stated, in 2005, that chances of a company doing business in SA being defrauded, was 2 X that of their counterparts in the rest of the world and that approx 83% of companies reported white collar crime of some form or another.
According to the most recent official crime statistics (June 2008), the number of reported cases of commercial crimes rose by an alarming 21%. It’s not just the case of discovered fraud as a direct consequence of downturn. However with effected and looming retrenchments of spouses’ etc, employees are bound to be tempted to extend their fingers where they shouldn’t really be reaching.
The fault can’t be squarely placed on the employees; it’s an issue of controls within the company. Employees spot weaknesses in internal controls of the organisations where they work, over time and often get tempted to exploit them before reporting them to management. Sadly, it’s often the trusted employees who go ahead and commit fraud.
The onus is on management to prevent this from happening:
· Companies should think about more than just payroll and costs when embarking on retrenchments;
· It’s about safe keeping of assets and ensuring these are not abused. fraud does not just mean employees stealing money;
· Management always have to look at what structures have been put in place to prevent fraud.
For small companies that may not afford forensic audits:
1. Make sure there is sufficient segregation of duties;
2. Watch out for any signs of irregularities;
3. Keep your ear to the ground, often other employees know about the fraud scams.
IABC does offer affordable internal audits. – Mwendabai – 011 – 312 3149
Read More
CIPC: Private Companies and Close Corporations Annual Returns:
This is an urgent message for members, directors and representatives of registered companies; Legislation was passed that makes submission of CIPC annual returns mandatory. If returns are not lodged and fees paid, your company will be de-registered (struck off) from the companies register at Cipro. The consequences of which are;
- You lose the legal status of your registered company;
- You might lose you business bank accounts;
- You will be unable to transact under the registered company particularly with financial institutions and other major players in the economy. You will be unable to access credit with any institution;
- You might be out of business altogether.
Should you require assistance with secretarial work, please contact Mr. Richard Ziko from our office on 011-312 3149.
Vat Returns Submissions:
Kindly be advised that Vat returns (Vat201s) for period 201108 (July 2011 & August 2011) were due and payable on 25 September 2011 and 30 September 2011 respectively and the returns (Vat201s) for period 201109 (August & September 2011) will be due and payable on 25 October 2011 for manual submissions and 25 October 2011 and 31 October 2011 respectively for electronic filers.
Please ensure that all submissions and payments are done on time to avoid interest charges and administrative penalties. Should you require assistance from our consultants, kindly provide our office with all the financial and transactional documents. You may contact our tax consultant, Mr. Richard Ziko on 011 – 312 3149 for further assistance.
Employee Taxes (PAYE, UIF & SDL) Returns Submissions:
Kindly be advised that the employee taxes returns (Emp201s) for period 201108 ( August 2011) were due and payable on 07 September 2011 and for period 201109 (September 2011) will be due and payable on 07 October 2011.
Please ensure that all submissions and payments are done on time to avoid interest charges and administrative penalties. Again, should you require assistance from our consultants, kindly provide our office with all the financial and transactional documents. You may contact our tax consultant, Mr. Richard Ziko on 011 – 312 3149 for further assistance.
Financial Year End (28 February 2012):
To all our contractual clients: Please note that we are yet again we will be coming yet to another financial year end. As a result, we will be doing a lot of clean up on our system databases in quarter 4 of the financial year in readiness for finalization of Trial Balances to 28 Fenruary 2012 to be used in the preparation of Annual Financial Statements and Annual Income Tax Computations. In these regard please bear with us and our consultants as we will be making numerous enquiries in order to close off any gaps that there may be in the system as well as to clear all suspense items so that we don’t have heavy reconciliation backlog towards ther end of the financial year (year end) . Please assist us in every way that you can.
To our non contractual clients, if you will need our assistance with annual financials, please note that we need full account of transactions accumulated during the course of the year as well a reliable set of financials for the previous year. You contact us either towards the end of February 2011 or in March 2011 to arrange for the preparation of your annual financial statements with us. You can speak to Mr. Siphiwe Nkovani of our office on 011 – 312 3149. Please note that effective year ends falling after 1 May 2011 (including the year ended 28 February 2012), companies will not be able to submit CIPC annual returns without preparing and submitting a full set of financial statements.
Dedicated Tax (Sars) and Secretarial (CIPC) Consultant:
To all our esteemed contractual and non contractual clients, please be advised that due to the fact that we are going into a very busy administration period for both Sars and Cipro requirements, particularly with a large part of the business community now registering private companies and those who had close coprorations (“CCs”) rushing to convert their CCs into private companies, IABC has appointed Mr. Richard Ziko to handle all CIPC and Sars related assistance requests and queries. He can be contacted directly on 011 – 312 3149.
Read More| OUTSOURCING |
Main key indicators only – 2 December 2010: Source: Statsa (StatsOnline):
- CPI: December 2010 = 3,5% y/y;
- PPI: December 2010 = +5,8 y/y
- GDP: 3rd Quarter 2010 2,6% q/q
- Unemployment: 25,3% 3rd Quarter 2010
- Population (Census 2001): 44,8 million Night of October 9-10, 2001
- Population (Mid-year estimate): 49,99 million Mid 2010
Interest rate in week of 17-21 January 2011:
Latest Rates (source: liberta.co.za):
Prime * = 9.00%; Repo * = 5.50%; CPI * = 3.50%; PPI * = 5.80%; GDP * = 2.60% ;
The latest interest rate cut by the SARB brings interest rates down to the lowest level they’ve been in 28 years. The prime interest rate is currently touching a 28-year low, which was equaled briefly in April 2005. Before that the last time South Africa had interest rates lower than what we have now was in February 1981.