Selling a business in Victoria: the nine things that stall settlement, and the section 52 statement

I have acted on several hundred business sales. The ones that fail do not fail on price. Price is agreed in week one. They fail in week six, on something the seller thought was a formality.

So this is the list of formalities. If you are selling, go through it before you sign anything, because every item on it is cheaper to fix before a purchaser’s lawyer finds it.

1. The section 52 statement

If the price is $450,000 or less, section 52 of the Estate Agents Act 1980 requires you, the vendor, to give the purchaser a statement in the prescribed form before they sign the contract. It sets out the business’s financial performance for the last two financial years and for the current year up to the most recent quarter: turnover, cost of goods, expenses, profit, and a set of specific questions about the business.

Three things about it:

• It is yours to prepare, with your accountant. The agent is not responsible for it, though a good one will refuse to exchange without it.
• If it is not given, the purchaser can void the contract. Not renegotiate. Void.
• It is signed and it is relied on. The figures in it are a representation. If they are wrong, the purchaser has a claim after settlement, which is the worst time to have the argument.

Most business sellers have never heard of it until their accountant mentions it, usually in a hurry. Start it the day you decide to sell.

2. The lease

The business is the lease. If you occupy premises under a lease, what you are selling is the right to operate from them, and that right is only transferable with the landlord’s consent to an assignment.

Under the Retail Leases Act 2003 a landlord cannot unreasonably withhold consent, but can require the purchaser to have the financial resources and business experience to meet the lease, can require information about them, and has 28 days from receiving everything it needs to respond. A landlord who wants the shop back for a nephew, or who smells a higher rent, will use every one of those days.

What the purchaser’s lawyer will also want to know: how long is left on the term, are there options, and what the rent review looks like. A business with 14 months left and no option is a business the purchaser is buying for 14 months.

3. Licences and registrations

A liquor licence is transferred by application to Liquor Control Victoria, in parallel with the sale, and the contract should be conditional on it. Food premises registration is with the council and is not transferable; the purchaser applies in their own name and the contract should allow for it. A tobacco licence, an accommodation registration, a childcare approval, a VicRoads licensed tester approval: each has its own process and its own timeline, and the sale cannot complete until the purchaser can lawfully open the door the morning after.

4. Finance on the equipment

The coffee machine is leased. The van is under finance. The fit-out was funded by a loan secured over all present and after-acquired property. The stock in the back room is on consignment from a supplier who registered an interest.

Every one of those is a security interest on the Personal Property Securities Register, and the purchaser’s lawyer searches it in week one. Anything registered must be paid out and discharged at or before settlement, or the purchaser takes the equipment subject to it. Pull your own PPSR search before you list. It is a few dollars and it tells you what you have forgotten.

5. Staff

Employees do not transfer automatically. The purchaser decides whom to offer employment, and the contract decides what happens to accrued entitlements.

The usual arrangement: the purchaser employs the staff it wants from completion, recognises their service for leave purposes, and the vendor allows the purchaser the value of accrued annual leave and long service leave as an adjustment at settlement. The alternative is that the vendor terminates everyone and pays out entitlements, which costs the vendor more and leaves the purchaser with no staff. Decide at heads of agreement, not at settlement.

If there are more than 15 employees, redundancy obligations may apply to anyone not offered a job. Check before you make promises to the purchaser about a “clean” handover.

6. GST

A business sold as a going concern is GST-free, which on a $600,000 sale is $60,000 the purchaser does not need to find. The conditions are strict and all four must be met: the purchaser is registered for GST; you supply everything needed to carry on the business (including the lease); you carry on the business until the day of supply; and the contract says in writing that the supply is of a going concern.

The usual failure is the second limb: the lease is not assigned at completion because the landlord is late, so the purchaser has not been supplied everything necessary. Tie the lease assignment to completion in the contract, and do not complete without it.

7. The restraint of trade

The purchaser is paying for goodwill, and goodwill is the customers continuing to walk in after you leave. A restraint clause stops you opening across the road. Courts enforce restraints only as far as reasonable to protect the goodwill sold, so a cascading restraint (10 km / 5 km / 2 km, three years / two years / one year) is standard and a blanket “Victoria, ten years” is not worth the paper.

Vendors sometimes resist restraints on principle. Resist instead on detail: the radius, the period, and whether it catches a business you already own elsewhere. Then sign it, because without it the price drops.

8. The training period and the handover

Two to four weeks of the vendor working in the business after completion, at no charge, is normal and should be in the contract with the hours specified. Supplier introductions, the recipe book, the alarm codes, the social media logins. The purchaser’s confidence in the goodwill they bought is set in those weeks, and so is whether they ring you with a claim in month three.

9. The money and the adjustments

Stock is usually counted the night before completion and paid for at cost on top of the price, with a cap. Prepaid expenses (rent, insurance, registrations) are adjusted. Customer deposits and gift vouchers are adjusted the other way. Security deposits and bank guarantees under the lease have to be replaced by the purchaser and released to you.

None of this is complicated. All of it has to be in the contract, because a purchaser’s lawyer will not let completion happen on a verbal understanding about who owns the Tuesday delivery.

The timetable, when it works

• Week 0Heads of agreement. Section 52 prepared. PPSR searched.
• Week 1–2Contract exchanged, conditional on lease assignment, licence transfer and (if applicable) finance.
• Week 2–6Landlord consent (28 days). Licence transfer lodged. Purchaser's due diligence.
• Week 6–8Conditions satisfied. PPSR discharges arranged. Staff offers issued.
• Week 8–10Stocktake. Completion. Training period begins.

The sellers who get to week ten on schedule are the ones who did weeks zero and one properly. The section 52, the lease position, the PPSR and the staff decision are all things you can resolve before a purchaser exists. Do them, and the sale is a transaction. Leave them, and it is a negotiation that starts the day you thought you had a deal.