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Sale of Business & Purchase of business (Franchise)

At Mendis & Gibson Lawyers, we have helped many small, medium business owners and franchise business owners to sell their business successfully.
At Mendis & Gibson Lawyers, we have helped many small, medium business owners and franchise business owners to sell their business successfully. Sale of business is not just finding a buyer and handing over the keys. There is a proper process to adhere to for you to take steps in accordance with and organisation of paperwork in order to reach a successful settlement.
We here to take make this process as easy as possible until settlement completion.
  • Preparing the Sale of Business Contract
  • Preparing the Lease Disclosure Statement
  • Making sure assets such as plant and equipment are properly transferred.
  • The transfer of contractual rights such as a premise’s lease or licence, equipment leases, supplier agreements, referral agreements, domain registrations and a franchise agreement.
  • The sale of intangible assets such as goodwill, trademarks, and copyright works.
  • The transfer of licences and other permits or registrations required by legislation such as business names and a liquor licence.
  • Transfer of employees and independent contractors & dealing with all entitlements such as annual leaves, long service leaves and other entitlements.
  • The disclosure to the purchaser of confidential information.
  • Successful transfer of Social Media (Facebook, Instagram, Twitter & YouTube).
  • Tax Consideration

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FAQS

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When I sell my business do I need to allocate a price for each individual item of assets and equipment?

It depends. Some small business owners sometimes sell the business for one price that includes everything such as business assets, equipment, Goodwill & plant, fitting and chattels. However, we usually advice our clients to apportion it if it possible to do so and we include a list of assets and equipment as a schedule in the contract.
Advantages are that a potential purchaser may have an interest in this level of detail being included in the contract if for example the purchaser intends not to use one of the items of plant but to either scrap or sell it after completion. Having an arm’s length agreement with the vendor about its value may assist the purchaser in dealing with the balancing adjustment that will arise from the subsequent disposal.
Also, tax advantage of when the vendor makes a tax claim for depreciation of depreciable assets and is entitled to make a further claim in the financial year in which the sale is made, on a pro rata basis up until completion of the sale. Similarly, the purchaser is entitled to claim depreciation on the assets from completion. Therefore, having a proper contract brings benefits for both the vendor and purchaser.

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What happens on the disposal of a depreciating asset, in a sale of business?

The vendor is required under sub-division 40-D Income Tax Assessment Act 1997 to make any required ‘balancing adjustment’ that arises out of the ‘disposal’. This is an adjustment to taxable income in the year of the ‘disposal’ based on any difference between the ‘adjustable value’, written down value after depreciation, and the market value. The balancing adjustment will either increase or decrease the vendor’s taxable income.

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If I am selling my business what should do I do with my current employees?

First important thing is to communicate with your employees about your plan as soon as possible when you intend to sell your business. The transfer of business provisions of Part 2-8 of the Fair Work Act 2009 deals with situations where a business is transferred from one employer to another. Having dealt with many business and employment law situations we can make the sale of business as smooth as possible without having an employment law issue for your business. Sale of business may affect the employment and entitlements of employees that are already working for the business.
Any accrued benefits of employees over and above personal/carers, annual and long service, bonuses, should be paid to the employees by the vendor and not assumed by the purchaser and this will not be liability of the purchaser. Usually a settlement adjustment is made to address this transfer of liability.

Key Considerations

  • The process essentially means that a staff member’s employment is terminated with the seller.
  • A new offer of employment may be made by the purchaser.
  • An employee cannot be transferred from one employer to another without their consent.
  • A purchaser is not legally required to make a new offer of employment to any of the former employees of a business after the business is sold.

Mendis & Gibson Lawyers

What should I do when I sell my business with Motor Vehicles transfer?

There is no stamp duty on business sales, duty is payable on the transfer of motor vehicles even if as part of a business sale. Duty is payable on the sale price or market value whichever is the greater: Transfer & motor vehicle duty fees.

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Why I need a sale of business contract when I sell my business?

Unlike real property, the sale of a business, in principle, is not required to be in writing and indeed many small operations pass hands by the exchange of a cheque for some plant and equipment and an introduction to the clientele. However, in order to get the going concern exemption from GST, the parties must have agreed in writing that the business is a going concern. Otherwise you end up paying GST portion from sale of busines to Tax office.

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Do I need to pay GST from my Sale of Business?

Goods and services tax may or may not apply to the sale of a business. The contract needs to deal with it either way. Any obligation to pay GST belongs to the vendor. The usual position is that the sale of a business is the sale of a going concern and therefore GST free. If it is not the sale of a going concern, then GST is payable, and the purchaser becomes entitled to an input tax credit. A provision needs to be included in the contract in these circumstances.

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Who bears the GST payable obligation?

Any obligation to pay GST belongs to the vendor. There is no statutory right for the vendor to pass on that liability to the purchaser. This must be done by a provision in the contract, unless the GST is included in the price as is anticipated by the contract. The usual position is that the sale of a business is the sale of a going concern and therefore GST free. If it is not the sale of a going concern, then GST is payable, and the purchaser becomes entitled to an input tax credit. A provision needs to be included in the contract in these circumstances.

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What is going concern in sale of business?

The going concern exemption was created to avoid the need for the purchaser to raise the additional funds to remit (pay) the GST. These funds are returned to the purchaser as an input tax credit. The benefit of the exemption is to the cash flow of the purchaser.
The 5 major elements that must be satisfied in order to claim the exemption are:

1. The vendor must supply all of the things necessary for the continued operation of an enterprise.
2. The vendor must carry on the enterprise until the day of supply.
3. The supply must be for consideration.
4. The purchaser must be registered or required to be registered for GST.
5. The vendor and the purchaser must agree in writing that the exemption is to be claimed. 

Mendis & Gibson Lawyers

What are the disclosure requirements on a sale of business?

Yes, you can during the negotiation stage, if the vendor has agreed it is better to get in writing in the sale of business contract and make sure you get trademark transferred to your business. If your business does not have a trademark registration, we can help you get your logo and wording registered as a trademark and registered under specific service class. Trademark is an intellectual property which you get exclusive right to. Please check our IP Law Service area where you can find detailed information regarding business branding and intellectual property.

What is a Section 52 Requirement? "Statement by a vendor of a small business".

This is a disclosure statement that vendors must provide purchasers when selling a small business in Victoria. The statement outlines the financials of the business over the past two years. If a Section 52 is not provided to the purchaser before they sign a contract agreement, document, or vendor/agent accepts a deposit, it gives the purchaser the right to avoid the contract within 3 months of signing if they haven’t taken over the business. Avoiding means all of the purchaser’s money and deposit are refunded and the contract ceases.

Mendis & Gibson Lawyers

I am selling my business, do I need to provide S 52 Statement?

It depends, you must provide a Section 52 to the purchaser if the total price of the small business is $ 450,000.00 or less. The goodwill, plant, equipment, and fittings of the business are used to calculate the total price. Keep in my mind the stock and intellectual property of the business do not form part of this calculation.

However, one exception to this S 52 statement is that, If your business holds an active licence or permit under the Liquor Control Reform Act 1998 you do not have to provide a Section 52.

This makes bars and restaurants with active liquor licences exempt from providing one.

However, we encourage client to seek legal advice as these areas are highly sensitive and requires to be professionally handled by an experienced lawyer. 

Mendis & Gibson Lawyers

What are the contents in a Section 52 Statement?

The Section 52 must include all content in the Form 2 document listed in Schedule 1 of the Estate Agents (General, Accounts, and Audit) Regulations 2018, including:

  • A: Important information for Vendor
  • B: Important information for Purchaser
  • C: Business information Section
  • D: Vendorʼs Business Operating Report
  • E: Vendorʼs declaration
  • F: Acknowledgement of Receipt by the Purchaser

All sections of this form must be complete and accurate. The vendor’s Business Operating Report is particularity important as it must show information for the current accounting period, information about the previous 2 accounting periods (unless the business hasn’t existed that long), and be certified by a practising accountant.

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Who Prepares the Section 52 Statement?

The Section 52 is prepared by the vendor’s accountant with the assistance of the vendor and their solicitor. Completion of the s 52 statement is difficult. Many of the required fields can be easily filled by the solicitor with full instructions, but the trading statement in the last pages must be completed by a qualified accountant.

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What happened if I did not provide S 52 statement or an incomplete version when I sold my business?

The purchaser has a legal right to avoid the contract and have all their money refunded within 3 months of signing a contract agreement or document if they have not taken over the business. However, if the vendor argues that the Section 52 is accurate, then purchaser may have to go to court to have their money returned. It is vendor’s responsibility to prove that he has given an accurate statement in the court. Therefore; getting s 52 prepared with accurate information is crucial.

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What happened if purchaser misses the 3 Month Deadline or fails to Settle?

Purchaser can only rely on the provisions of the section 52 statement to get out of the contract within the 3-month deadline and before settlement. If you settle you cannot rely on the Section 52 Statement, however you may have a contractual remedy depending on what terms are included in the contract or based on your factual circumstances. The purchaser will also have their rights at common law or under other legislation such as the Australian Consumer Law and Fair Trading Act (ACL) if the vendor has misstated the facts.

Mendis & Gibson Lawyers

What does Section 51 statement or Finance disclosure requirement mean?

Another consequence of selling a prescribed small business in Victoria is s 51 of the Estate Agents Act. This section imposes an obligation on agents who offer finance to a prospective purchaser to get an acknowledgement of the offer of finance from the purchaser in another prescribed form. If the agent does not get this acknowledgement, again the purchaser has a right to avoid the contract.
Agents always say that they have not offered to find or provide finance. In these days of ready finance from prime lenders, purchasers seldom need help to find the money. Though, we usually check with our clients when we act for purchasers whether such an offer was made, and if it was, required to see the s 51 statement.

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What are the Additional disclosures?

  • The vendor also requires attaching copies of the current lease and disclosure statement any assignments/transfers, details of the title to the land and its zoning.
  • A list of plant and equipment.
  • A list of employees to which the transition of employment obligations will apply; or
  • A list of trading stocks.
  • Others disclosures depends on the industry.

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What happens to my Debtors (accounts receivable) during the sale of business?

If debtors are included in the sale of business contract then the consideration received by the vendor will not generally be subject to tax. Namely, most businesses return their income on an earnings (accruals) basis and, therefore, the vendor will have already brought the invoices to account on the issue of such invoices. However, if the vendor is a cash basis taxpayer, then the consideration received for debtors transferred in the sale contract will be subject to tax as ordinary income. Any debts written-off prior to the sale (and not transferred) will be tax deductible to vendors on revenue account.

Mendis & Gibson Lawyers

At the settlement of Sale of business what sort of adjustments or actions will my lawyer undertake?

Depending on the type, size and industry of the business it will be necessary to adjust some of the following expenses and registration/transfers but not limited to the below:
  • Rent and outgoings
  • Employee entitlements
  • Stock
  • Licences and registrations
  • Debtors and creditors
  • Work in progress
  • Registration transfer of motor vehicles
  • Transfer of domain names,
  • Transfer of business name or applying new business name
  • Transfer of trademark or application.
  • Transfer of lease or new lease.
  • Transfer of supply agreements
  • Transfer of liquor and gaming licences

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Our Founders Sidney Mendis and Anna Gibson established Mendis & Gibson Lawyers nearly 20 years ago. Over the decades, we have grown to become one of the leading Law firms in Melbourne with offices in North West, Melbourne CBD and South East.

Main Office (Niddrie/Essendon)

Melbourne CBD

Dandenong Office

IMPORTANT LINKS

Our Founders Sidney Mendis and Anna Gibson established Mendis & Gibson Lawyers nearly 20 years ago. Over the decades, we have grown to become one of the leading Law firms in Melbourne with offices in North West, Melbourne CBD and South East.

Main Office (Niddrie/Essendon)

Melbourne CBD

Dandenong Office

IMPORTANT LINKS

IMPORTANT LINKS

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