If you are buying a small business in Victoria, you will likely receive a Victorian Sale of Business Contract. This is a standard contract (a “standard form contract”) that is typically used in most sales of small businesses in Victoria. Although there is no obligation to use this standard contract, it is a widely accepted practice. This article will explain why you should use this standard form contract and explain some of the key provisions in this contract.
Why Use a Standard-Form Contract?
The main benefit of using a standard form contract is efficiency. It allows the parties to execute the deal quickly and at a low cost. The contract’s extensive use means both parties often have some understanding of the existing terms as well as what the contract does and does not cover. Parties also have some certainty as to how the court will interpret certain provisions. The standard form contract also has the benefit of containing most of the clauses you would expect in a sale of business contract.
Key Sale of Business Contract Clauses
Clause 1: Cooling-Off Period
The contract provides you with a three-day cooling-off period. This means that after you sign the contract, you have three days to terminate the contract if you decide you do not want to continue with the sale. The vendor will need to refund any money you have paid.
Clause 5: Ownership of the Business
This clause states that you do not gain ownership of the business and its assets until settlement. The clause also provides that you can terminate the contract if any of the business assets are damaged and that damage significantly and negatively affects the business. This is important as it provides you with an “out” if something significant changes in the business between exchange and settlement.
Clause 8: Training Clause
The vendor must train you in the operation of the business for the agreed length of time. Note that training is not limited to just the general day to day operations. It also involves introducing you to suppliers and regular customers. It is a good idea to leverage this clause even if you have experience operating a similar business in the industry.
Clause 9: Inspect the Business and Its Records
This clause allows you to inspect the business and its records. It is imperative that you conduct proper and thorough due diligence on the business’ records. This includes:
- an inspection of the business’s financial records; and
- a review of any:
- supplier agreements;
- employment contracts; and
- customer contracts.
You do not want to buy the business and then find out that the contract it has with a major customer expires in six months. This is why it is important to take advantage of this clause and inspect the business’ records thoroughly.
Clause 11: Handling Business Stock
This clause sets out the rules regarding the handling of the business’ stock at settlement. Essentially, a stocktake will need to occur. This allows you to determine whether the amount of stock to be sold to you matches with what was agreed.
Clause 15: Lease
This clause requires that both you and the vendor work together to ensure that either:
- a new lease is granted; or
- any existing lease for the business premises is transferred to you.
Clause 16: Agreements With Third Parties
A business may have multiple agreements with third parties. This clause obliges the vendor to take reasonable measures to transfer these agreements to you. Clause 16 also allows you to adjust the purchase price or terminate the contract if the vendor cannot transfer an important third party agreement.
Clause 20: Restraint Clause
Clause 20 prevents the vendor from competing against you. As a rule of thumb, a restraint clause should not be too broad as this could render the clause unreasonable and therefore unenforceable.
Clause 21: Warranties
This clause sets out all the warranties or promises you and the vendor make to each other. Despite these warranties, it is still prudent to inspect the business yourself. It is easier and cheaper to identify a potential problem from the outset than to remedy it by relying on a breach of warranty later down the track.
The Victorian Sale of Business Contract is a standard form contract with set clauses detailing how the sale of a business is to take place. It is important that you understand your rights and obligations under the contract and that you undertake thorough due diligence on the business before purchasing it. If you have any questions about the terms of your sale of business contract get in touch with LegalVision’s business purchase lawyers on 1300 544 755 or fill out the form on this page.
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