If you are buying a small business in Victoria, you would commonly receive a “Victorian Contract of Sale of Business”. This is the “standard” form contract that the Estate Agents (Contracts) Regulations 2008 (Vic) prescribes and is typically used in most sales of small businesses in Victoria. Although there is no obligation to use this “standard” form contract, it is accepted practice. We explain why you should use the “standard” form contract and highlight some notable provisions you should familiarise yourself with.
The most obvious benefit of using a standard form contract is efficiency which means the deal can be completed quickly and cheaply. The Contract’s wide use means both parties will have some understanding of the existing terms as well as what the contract does and doesn’t cover. Parties also have some certainty as to how the court will interpret certain provisions. The “standard” form contract has the benefit of containing most of the clauses you would expect in a sale of the business contract including the following.
Clause 1: Cooling Off Period
The “standard” form contact provides you with a three-day cooling off period. This means that after you sign the contract, you then have three days to terminate if you decide you don’t want to continue with the sale. The vendor will need to refund any money you paid.
Clause 5: Ownership of the Business
Clause five states that you don’t gain ownership of the business and its assets until settlement (or as the “standard” form contract defines, completion). The clause also says that if any of the assets are damaged to the extent that it materially and adversely (i.e. significantly and negatively) affect the business, then you can terminate the contract. This is important as it provides you with an “out” if something significantly changed in the business between exchange and completion.
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. We then recommend that even if you are experienced in operating a similar business in the industry, you should still leverage this clause.
Clause 9: Inspect the Business and its Records
Clause 9 allows you to inspect the business and its records. We cannot emphasise enough how important it is to conduct proper and thorough due diligence on the business’ records. This includes not only an inspection of the business’s financial records, but also a review of any supplier agreements, employment contracts, and customer contracts. For example, the last thing you want is to buy the business and then to find out that the contract it has with a major customer expires in six months. This is why it’s important to take advantage of this clause and to inspect the business’ records.
Clause 11: Handling Business Stock
This clause sets out rules around handling the business’ stock at completion. Essentially, a stocktake will need to occur and you will then get an opportunity to determine whether the amount of stock to be sold to you matches what was agreed.
Clause 15: Lease
Both you and the vendor are under an obligation to work together to ensure that any lease for the business premises is transferred to you or a new lease is granted.
Clause 16: Agreements With 3rd Parties
A business may have multiple agreements with 3rd parties and this clause obliges the vendor to use reasonable endeavours to transfer these agreements to you. Clause 16 also operates to allow you to adjust the purchase price or terminate the contract if the vendor can’t transfer an important third party agreement. Again, remember to inspect these agreements as there is no point transferring if the agreement ends in a month.
Clause 20: Restraint Clause
Clause 20 operates to prevent the vendor from competing against you. Restraint clauses are a very complex area of law but as a rule of thumb, a restraint should not be too wide as this can mean that it’s unreasonable and therefore unenforceable.
Clause 21: Warranties
This clause sets out warranties or promises the vendor gives to you and you to the vendor. Despite these warranties, it’s still prudent to inspect the business yourself. It’s easier and cheaper to identify a potential problem from the onset rather than trying to remedy it by relying on a breach of warranty later down the track.
There are obviously other clauses that are also relevant in the “standard” form contract, and these are only some of what our sale of business lawyers consider being the most notable. It’s critical, however, that you read through all of the clauses and ensure you understand them. If there’s anything you don’t understand, it’s a good idea to get professional help and our lawyers are always happy to assist. Get in touch on 1300 544 755.