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Mo’ Money, Mo’ Disclosure

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By Eleanor DeMarzi, Lawyer, MST Lawyers

With no fanfare, last month the Victorian Parliament increased the threshold purchase price of a “small business” to $450,000 below which a vendor must provide a disclosure statement. Commonly known as a “section 52 statement”, the disclosure statement provides a summary of the recent trading and financial performance of the business to be sold. Disclosure statements are now required for the sale of a small business valued up to $450,000, an increase from $350,000. 

For the purposes of the disclosure statement requirement, the Estate Agents (General, Accounts and Audit) Regulations 2018 (Vic) now define a “small business” as one in which the goodwill, plant, equipment and fittings are sold or offered for sale at a total price not exceeding $450,000.  However, a disclosure statement is not required for a sale of a business in which a liquor licence or permit is in force and necessary for the carrying on of the business.  

Failure to provide a disclosure statement before the purchaser signs the sale of a business contract or pays the deposit, or the provision of an inaccurate or incomplete disclosure statement, can have serious consequences.  These include that:

  • the vendor (or estate agent acting on their behalf) may be guilty of an offence and liable for a fine of up to 10 penalty units ($1,585.70);
  • the purchaser may avoid the contract, provided that they do so within three months of signing the contract and have not already taken possession of the business;
  • the purchaser may claim the return of any money paid to the vendor; and
  • the purchaser may claim damages against the vendor for misleading or deceptive conduct or unconscionability if, for example, the earnings, profitability, liabilities or expenses of the business were misrepresented by the vendor.

It is therefore essential that vendors obtain professional legal and accounting advice when selling a business to ensure that their statutory disclosure obligations are met and to minimise the risk of a dispute arising as to the information provided to the purchaser.  This is important even if the value of the business exceeds $450,000, as although a statutory disclosure statement is not required, the purchaser may still have rights against the vendor concerning misleading or deceptive conduct.  Conversely, purchasers must ensure that any disclosure statement they receive is reviewed by a lawyer and accountant to ensure compliance and is supplemented with the purchaser’s own independent due diligence.

Other changes introduced by the recently enacted legislation include the following:

  • the “Business Operating Report”, which must be contained within the disclosure statement and certified by a practising accountant, now includes an additional section requiring the disclosure of the cost of goods sold and the various types of operating expenses that;
  • the Business Operating Report must show the required information not only for the last two financial years (unless the vendor has not owned the business for that long) but also for the current financial year (that is, year to date figures). This means that a disclosure statement must show the business’ financial and accounting information up to the end of the most recent quarter before the disclosure statement was signed; and
  • a new paragraph in the disclosure statement which provides that where the sale of business is to include an assignment of lease of retail premises, the vendor will give to the purchaser a disclosure statement in accordance with section 61(5A) of the Retail Leases Act 2003 (Vic). The latter section refers to the disclosure statement prescribed under the regulations that must be provided by a tenant to the landlord and assignee upon an assignment of a lease of retail premises which will continue to be used for an ongoing business.  Separately, it should also be noted that the tenant must provide the assignee with a copy of any disclosure statement they received concerning the lease and details of any changes that have affected the information in that disclosure statement since given to the tenant before requesting the landlord’s consent to an assignment of the lease.

If you are considering selling or buying a business and require advice as to your rights and obligations, please email or call us on +61 3 8540 0200 for assistance.