Small Sales, Big Risks for Business Brokers

201501.14

The failure of a vendor or a vendor’s agent to comply with the disclosure requirements under the Estate Agents Act 1980 (Act) when selling a small business in Victoria can result in penalties, lost sales and potential claims by disgruntled vendors.

Section 52 of the Act imposes an obligation on a vendor and their agent to give the purchaser of a ‘small business’ a completed and signed copy of a Statement by a Vendor of a Small Business (Trading Statement) before the purchaser:

(a) signs a contract or agreement (which is legally binding or intended to be legally binding); or
(b) pays the deposit

Section 4 of the Act defines a ‘small business’ as a business where the goodwill, plant, equipment and fittings being sold have a total price not exceeding $200,000 (or such other amount as prescribed by the regulations).  The current prescribed amount is $350,000.

Interestingly, a Trading Statement is not required in relation to the sale of any business which has a licence or permit in force under the Liquor Control Reform Act 1998.  It is difficult to understand the policy rationale behind this exemption, particularly given that many small cafés and restaurants would otherwise fall within the definition of a ‘small business’.

The Trading Statement needs to be prepared in the prescribed form, contain the prescribed particulars, and has to be signed by the vendor and acknowledged by the purchaser.  Any attempt to exclude or evade the requirements to comply with section 52 will be void and of no legal effect.  The financial information must cover the trading of the business in the last two accounting periods, unless the vendor has not owned the business for that long.

If the Trading Statement is incomplete or inaccurate, the purchaser may avoid the contract:

(a) prior to taking possession of the business, or
(b) within three months of signing the contract.

If a purchaser avoids a contract on these grounds, the vendor must repay any money paid by the purchaser.  A vendor or vendor’s agent who fails to give a purchaser a Trading Statement, or provides an inaccurate statement, is also liable for a fine of up to 10 penalty units.

In addition to the statutory right to avoid the contract following a breach of section 52, the purchaser may also still have rights at common law or under other legislation such as the Fair Trading Act 2012 (Vic) and the Australian Consumer Law if the vendor has misstated the facts.

For the above reasons, it is incumbent upon business brokers to advise vendors (where required) of the need to give a purchaser a Trading Statement before entering into a sale (or taking a deposit), and the risks of failing to do so.  The vendor’s accountant would normally be engaged to prepare this on behalf of the vendor, and this is certainly preferable from a risk liability perspective.

Even if a Trading Statement is not strictly required for a transaction, you might still wish to advise your vendor to obtain one to help to facilitate negotiations with a prospective purchaser.  Ultimately, this might assist in reducing the level of due diligence enquiries, and therefore help to get a sale over the line more quickly.

In summary, it is recommended that when dealing with a small business you:

(a) familiarize yourself with the section 52 requirements
(b) have a standard letter or email to the vendor advising them of the requirements/risks
(c) advise your clients to engage an accountant to prepare the Trading Statement (don’t do it yourself)
(d) ensure the Trading Statement is provided to the purchaser before you enter into a binding agreement or accept a deposit

Matthew Baker-Johnson
Principal, Avery Commercial Lawyers

Matthew is an experienced commercial lawyer who regularly advises parties in relation to sale of business matters.  He is a member of the Law Institute of Victoria (LIV) and an associate member of the Australian Institute of Business Brokers (AIBB)

Disclaimer: The information contained in this article is intended to provide general information only and is not legal advice or a substitute for it.  You should always consult your own legal advisors to discuss your particular circumstances.