New regulations apply to the sale of small businesses

New regulations apply to the sale of small businesses

The Estate Agents (General, Accounts and Audit) Regulations 2018 came into operation on 20 May 2018. The changes are relevant to the sale and purchase of a small business in Victoria.

Background

For those unfamiliar with the area, vendors of a small business in Victoria must give a purchaser a prescribed statement under section 52 of the Estate Agents Act 1980. This ‘section 52 statement’:

  • must be given prior to the purchaser signing the contract of sale or the vendor accepting a deposit; and
  • sets important financial details about the business, including its assets, profits and losses.

 A vendor’s failure to comply with the requirements will allow the purchaser to avoid the transaction if it wanted to.

The changes to section 52 statements

The recent changes include:

  1. An update to the definition of small business. A ‘small business’ is a business that sells (or marketed) for less than $450,000 (previously $350,000).
  2. The exclusion of the value of any liquor licence when determining whether the sale price exceeds the above threshold. This is a new provision which raises a number of issues, particularly:
    • how do you quantify the value of the liquor licence separately from the business; and
    • how does this affect section 52(8) of the Act (see below).
  3. There is a new requirement that the financials cover the current accounting period, specified as year to date figures.
  4. There is a new requirement that vendors give purchasers a disclosure statement under the Retail Leases Act 2003. This is a curious addition, because retail leasing laws already cover the disclosure statement.

Liquor licences

The changes referred to at paragraph 2 above raise an interesting question. Section 52(8) of the Act contains provisions dealing with liquor licences. That section states that the entirety of section 52 does not apply:

to the sale of any business in connection with which a licence or permit is in force under the Liquor Control Reform Act 1998 and which the purchaser could not lawfully carry on without a licence under that Act”.

Vendors and business brokers have argued that due to section 52(8), a section 52 statement isn’t required whenever there is a liquor licence. For example, a cafe with a liquor licence would be exempt from having to provide a section 52 statement. The counter argument is that the exemption only applies if the liquor licence is essential to the carrying on of the business such that the business could not be lawfully carried on without one. For example, you can’t run a bottle shop without a liquor licence, but a cafe does not need to serve alcohol.

In my view, the new regulations appear to resolve the position in favour of the counter argument noted above. A business which holds a liquor licence will be subject to section 52 of the Act. However, the value of that liquor licence is not included when considering the small business threshold.

Retail leases

The new requirement mentioned in paragraph 4 above also raises a practical issue for vendors. The provision of a lease disclosure statement in accordance with section 61(5A) of the Retail Leases Act 2003 requires vendors to be fully across certain information relating to their tenancy. For this reason, it is not uncommon for a request to be made to the landlord for updated information in order to prepare that disclosure statement. If a vendor has to give a disclosure statement at the same time as the section 52 statement, they would need to prepare well in advance of listing their business for sale. This may involve alerting the landlord to a potential sale earlier than would otherwise have been required.

Conclusion

The changes brought about by the new regulations capture more businesses within the definition of small business. They also ensure vendors provide more meaningful and accurate information to purchasers of those businesses. This is not surprising given the recent negative publicity surrounding the franchising sector in particular.

Vendors need to be aware of these expanded obligations, to ensure that their contract binds the purchaser. If you are looking to buy or sell a small business, get in touch.