Sellers often overlook the need to prepare a “vendor’s statement” - also known as a “Form 2” - when selling their small business in South Australia.
What is a vendor’s statement
The requirement to prepare a vendor’s statement arises under the Land and Business (Sale and Conveyancing) Act 1994 (SA) (“Act”).
The Act provides that a seller of a “small business” must provide the buyer with certain details about the business at least 5 business days before settlement occurs. A “small business” sale occurs if the “business” is sold for an amount not exceeding $300,000 (excluding GST). The details that the seller needs to provide must:
- be presented in the form set out in the Land and Business (Sale and Conveyancing) Regulations 2010 (SA) (“Regulations”);
- include details of the buyer’s right to “cool-off” or walk away from the sale; and
- include certain financial details of the business including details of sales, costs of goods sold, the quantum of certain expenses and profit for the past 3 years. The seller is also required to disclose certain details in relation to the lease, business structure, employee remuneration, tax compliance and a range of other matters.
In addition to the above requirements, the vendor’s statement must include a certificate signed by a “qualified accountant” under which the accountant certifies that:
- the financial information in the statement fairly and accurately represents the financial operations of the business; and
- the accountant is not aware of any circumstances that would render any of the information in the statement inaccurate or misleading.
It is possible for the buyer to waive the requirement for the seller to prepare the vendor’s statement. However, in order to do this the buyer must obtain legal advice from an independent solicitor on waiving compliance and the solicitor must sign a certificate in the form set out in the Regulations. It is therefore not possible for the seller and the buyer just to agree that a vendor’s statement need not be supplied by the seller.
Am I selling a “small business”?
As noted above, a “small business” sale occurs if the purchase price is $300,000 or less (excluding GST).
The value of any stock being sold with the business must be excluded from the purchase price calculation. This can be significant in the context of the sale of certain retail business where the value of stock comprises a significant portion of the purchase price.
If the sale of the business also involves the sale of land then the value of the land being transferred is to be excluded from the purchase price calculation. If no specific value is attributed to the land, then the valuer general’s value is to be used.
In determining whether a small business sale occurs, it is the purchase price payable by the buyer for their interest that is relevant – not the value of the underlying business. This is on the basis that the $300,000 threshold applies to the sale of a “business” and the term “business” is defined to include an interest in a business. Some implications of this are demonstrated in the following examples:
Jack’s business has been valued at $1 million. Ashley has agreed to purchase a 20% interest in Jack’s business for $200,000. Ashley’s acquisition would be a small business sale and Jack would be required to prepare a vendor’s statement.
The Farrah Unit Trust owns a retail business valued at $2.05 million. The Farrah Unit Trust has external debt of $1.3 million and therefore has net assets of $600,000. Vicky has agreed to sell 1 of the three units on issue in the Farrah Unit Trust to Liam for $250,000. Liam’s acquisition would be a small business sale and Vicky would be required to prepare a vendor’s statement.
What happens if you don’t serve a vendor’s statement?
Failure to provide a buyer with a vendor’s statement can result in the seller being liable for a fine of up to $10,000.
The buyer can also make an application to the Court, which is given wide powers under the Act. These powers include unwinding the sale as well as an order for damages against the seller.
Can this apply to the sale of shares in a company or units in a unit trust?
The term “business” is defined broadly in the Act. It includes “shares, or interest, in a business or the goodwill of a business” but specifically excludes shares in a company. Whilst a specific carve out is provided for shares in a company, there is no specific reference in the Act or Regulations to the position regarding the sale of units in a unit trust. Therefore, determining whether the sale of units in a unit trust is caught by the Act is matter of statutory interpretation.
It is well established that unitholders in a unit trust generally have a beneficial interest in the entirety of trust property. If the unit trust holds a business then this trust property would include that business.
Whilst the position is not without doubt, we consider that there is a reasonable argument that the seller of units in a unit trust that carries on a “small business” is required to prepare a vendor’s statement under the Act. This is on the basis that:
- the definition of “business” is broad and includes “an interest” in a business; and
- as noted above, unitholders generally have a beneficial interest in all of the assets of the unit trust (which may include a small business).
We consider that the inclusion of a specific carve-out for shares in a company but omission of any reference to units in a unit trust supports this view.
Given the above, we recommend that sellers prepare a vendor’s statement where they are selling units in unit trusts that owns a small business.
We have significant experience in helping clients buy and sell businesses. As a full service commercial firm we are equipped to assist clients in all legal aspects of business sale transactions including assisting in the preparation and negotiation of sale documents as well as providing specialist business structuring, tax, employment, real property, intellectual property, finance and commercial advice.
Section 8(1) of the Act.
Section 8(1) of the Act.
See Schedule 1 of the Regulations.
Section 8(2) of the Act.
Section 14 of the Act.
Section 15 of the Act.
See the definition of “business” in section 3 of the Act.
See, for example, Smith v. Anderson(1880) 15 Ch D 247.