Don’t forget the Form 2! Tips and traps for selling a business in South Australia
Selling a small business can be a great moment: you have built up your business from nothing or improved on a business you bought. You are ready to move on and want to pass on your work to a new person keen to build on your success. You don’t want to ruin that moment by missing steps that mean the purchaser can come back to you if it all goes wrong!
If you are selling your small business it is important that you comply with your legal requirement to provide a purchaser with a Form 2 – Vendor’s Statement. A Form 2 is a disclosure statement that must be provided by a vendor to a purchaser of a small business under the Land and Business (Sale and Conveyancing) Act 1994 (Act).
When is a Form 2 required?
A Form 2 is required if you are selling a “small business”. The Act defines a small business as one which the total purchase price of the business is $300,000.00 or less. Even if the business is being sold for $5,000.00 you still need to provide the statement. It can also apply even when you think the total price might exceed $300,000.00. This is because the $300,000.00 excludes:
- the value of any stock in trade that is sold under the contract; and
- If land is being sold as part of the business, the purchase price of that land.
Information in the Form 2
The Form 2 contains certain details relating to the business being sold and must take the form set out in the regulations to the Act. It must include:
- the purchaser’s “cooling-off” rights;
- the prescribed particulars required under Schedule 1 of the regulations, relating to:
- a summary of the financial performance of the business being sold;
- the depreciated value of the plant and equipment being sold;
- trading statements for the last 3 financial years;
- other particulars, including the period of time the vendor has been carrying on the business and the trading from the business premises, the lease terms, workplace, employees, and so forth; and
- a certificate signed by or on behalf of a qualified accountant (not the vendor) certifying that the accountant has examined the accounts of the business and that the financial particulars disclosed on the Form 2 appear to be in conformity with the accounts of the business.
It is important to note that if land is being sold as part of the business, the prescribed particulars in the Form 2 must contain the particulars that would be required if the land was being sold separately. Those particulars take the form of those set out in the Form 1 (the required disclosure statement for the sale of land) and includes particulars of all mortgages, charges and prescribed encumbrances affecting the land subject to the sale.
The Form 2 discloses all required information so that a purchaser is aware of any particulars of the business that could affect their decision to purchase the business. If the purchaser is not satisfied with the information contained in the Form 2 (or decides against the purchase for other reasons), the purchaser has the right to withdraw from the contract during the “cooling off” period.
The “cooling off” period
A purchaser of a business is entitled to a “cooling-off” period, during which the purchaser may withdraw from the contract by giving written notice to the vendor or the agent acting on behalf of the vendor.
It is a reasonably short period of time in which the purchaser can review their decision to purchase the property and can withdraw from the contract if necessary.
The “cooling-off” period commences on the next business day after the Form 2 was served and expires on the end of the fifth clear business day after it was served.
The method of “cooling off” must comply with the requirements of the Act for giving written notice to the vendor or the agent acting on behalf of the vendor.
Where a purchaser exercises its “cooling off” right and withdraws from the contract, it is entitled to the return of money paid (deposit) under the contract, except that if the deposit does not exceed $100.00 then the vendor is entitled to retain that money.
Not all purchasers of businesses have the right to cool-off. For example, the “cooling-off” period does not apply if the purchaser, before signing the contract, received independent advice from a legal practitioner concerning the contract and the practitioner signed a regulation approved certificate that the practitioner gave the purchaser that advice. This is usually required where settlement for the sale of the business is urgent and the purchaser agrees to waive their rights.
Service of a Form 2
A Form 2 (signed by the vendor) must be provided to the purchaser no later than 5 business days before the settlement date.
It may be served either before or after the signing of the contract and can be served in one or more of the following ways:
- by delivering it to the purchaser personally;
- by posting it by registered post to the purchaser at its last known address;
- by faxing it to a fax number provided by the purchaser; or
- by emailing it to an email address provided by the purchaser.
The Form 2 must be accurate as at the date of service on the purchaser.
What happens if you fail to serve a Form 2?
Any non-compliance with the requirements of the Act relating to the service of a Form 2 could potentially lead to serious consequences to the vendor.
Whilst the Act does not render the contract void as a consequence of a failure by the vendor to provide a valid Form 2, certain remedies are provided to the purchaser. Broadly speaking the remedies include a right to ‘walk away’ before the date of settlement, or, if the settlement date has passed, the right to seek a remedy under the Act or at common law.
If the purchaser decides to commence proceedings in Court against the vendor, the Court has the power to set aside the contract or award damages if it can be shown that the purchaser has been prejudiced as a result of not receiving a Form 2 or it is defective.
It is an offence under the Act not to comply with the statutory requirements and it carries a maximum penalty of $10,000.00. There are limited defences available in the event of a charge for an offence or civil proceedings brought by a purchaser.
Why trust Johnston Withers Lawyers and Conveyancers as your Commercial Property Lawyer
Our team of commercial property lawyers and registered conveyancers have extensive experience in the preparation of Vendor’s Statements and contracts for the sale of business and land. We are able to act as conveyancers in business settlements for vendors and purchasers. If you need assistance with preparing a contract for the sale of business and a Form 2 or require a conveyancer for your settlement, please contact Gemma Wallace.
The content of this article is intended to provide a general guide to the subject matter. It is not legal advice. Specialist advice should be sought about your specific circumstances.