Purchasing a Small Business

20 April 2022

When purchasing a small business, that is a maximum price of $450,000.00, a section 52 Statement must be provided by the Vendor. The section 52 statement must be in the prescribed form set out in the Estate Agents Act 1980 (“The Act”).

The Vendor’s accountant usually prepares the section 52 statement and must be signed off by the accountant verifying the information. The section 52 Statement sets out the businesses financial performance over the past two (2) years including the financial information up to the most recent quarter.

It is highly recommended that when purchasing a business that this section 52 statement is always provided regardless of any situation i.e. when the Vendor and Purchaser are already colleagues and the Purchaser is involved in the daily running of the business.

If the Vendor does not provide a section 52 statement, or if the section 52 statement is false or inaccurate or not in the prescribed form, the Purchaser has a right to rescind the contract.  Should the purchaser exercise their right to rescind the contract, they must do so:

  1. Within three (3) months after the date of execution of the contract; and
  2. Prior to settlement/prior to taking control of the business.

If the Purchaser does not rescind within the time frames as stated above, the Purchaser may be taken to have waived their right of doing so.

The only exemption where a Vendor is not required to provide a section 52 statement is if there is an active liquor license involved. This requirement is waived under section 52(8) of the Act.  A Vendor may still provide a section 52 statement however note that it is not required. Where a section 52 statement is not required, it is recommended that the vendor provides the latest BAS.

Another issue we see frequently is when there are permits required to run the business however Purchasers do not account for the timing of the transfer of the permits/applying for permits when agreeing on a settlement date. We understand clients are eager to commence their new business venture and this is usually where a special condition needs to be included in the contract of sale to allow for any issues in the transferring/obtaining of the same.

Purchasers need also be aware that if the business is conducted from leased premises there needs to be a transfer of the lease. To transfer the lease, you must obtain consent from the landlord. Whilst the landlord cannot in most circumstances unreasonably withhold consent to transferring the lease, there may be issues in relation to the landlord approving the transfer. This should be noted in the contract and settlement must be subject to the landlord’s approval.

Always check with the vendor for the details of the employees of the business and their entitlements. This should be attached as a schedule to the contract. We would always suggest that the contract allows for any entitlements such as holiday pay or long service leave to be adjusted at settlement. 

Finally, always seek an accountant’s opinion in relation to the value of the business and to GST issues on the purchase of the business. An issue to be reviewed is whether the sale will qualify as the supply of a “Going Concern” pursuant to section 38-325 of A New Tax System (Goods and Services Tax) Act 1999.