Ms Li has her eye on a long-established bubble tea shop in Melbourne's south-east. The seller says weekly takings are steady and wants a deposit quickly. When buying a business in Victoria, the most important step is due diligence before you sign: verify the trading figures, lease, equipment, staff and liabilities, and make key matters such as approval of the lease transfer, review of the financials and finance approval conditions of the contract. Once you have signed unconditionally and settled, chasing problems afterwards is usually slow and costly.
Key points
- In Victoria, where a small business under a prescribed price is sold through an agent, the seller must provide a statutory vendor statement (Section 52 Statement) setting out trading figures for the last two financial years and the current year to the latest quarter.
- The lease is often the most valuable part of the business; check the remaining term, options and transfer conditions first.
- In an asset purchase the seller's existing debts generally do not pass to you, but search the Personal Property Securities Register (PPSR) to confirm the equipment is not subject to a security interest.
- When staff move to the new owner, their service and leave may carry over, and the price should be adjusted for this.
- Stock is usually counted on settlement day and paid for separately as the contract provides.
1. Be clear about what you are buying
Most small businesses are sold as an asset sale: the buyer acquires the goodwill, equipment, stock, business name, website and social media accounts, phone numbers, recipes and so on, while the seller's company itself is not transferred. If you buy the shares in a company (a share sale), all of its past debts, tax and disputes stay inside the company, so you need much broader investigation plus warranties and indemnities from the seller. Also confirm that the licences the business needs can be transferred or re-applied for, such as the food business registration with the local council or the transfer of a liquor licence through the Victorian liquor regulator.
2. Due diligence: what to check
- Financials: compare the vendor statement line by line with tax returns, BAS lodgements, bank statements and point-of-sale data; do not pay for “cash takings” that cannot be proven.
- Debts and security: search the PPSR, ASIC company records and court records, and check whether equipment is leased or subject to finance.
- Contracts: find out whether contracts with suppliers, delivery platforms and any franchisor can be transferred to you, and on what terms.
- Compliance: check whether staff are paid under the correct Modern Award and whether the premises has council complaints or compliance notices.
- Operations: observe customer traffic yourself at different times and ask an accountant about typical margins in that industry.
3. Contract terms that protect the buyer
Business sales in Victoria commonly use an industry standard contract with special conditions added. Conditions buyers often ask for include: the landlord consenting to the lease transfer or granting a new lease; an accountant's satisfactory review of the books; finance approval; the seller providing training for a period after settlement; and the seller agreeing not to run a similar business within a set area and time. The deposit is usually held by the agent or another stakeholder. If both parties are registered for GST and the seller supplies everything needed to continue operating, the sale can be treated as the supply of a going concern and be GST-free, but this must be agreed in writing in the contract.
4. The lease: the document that decides whether the business survives
Most shop leases are covered by the Retail Leases Act 2003. Transferring (assigning) the lease needs the landlord's consent, which the landlord can only refuse on statutory grounds, such as the new tenant lacking financial resources or business experience. Check that the remaining term plus options is long enough to recover your investment, and review the rent review method, outgoings, demolition or relocation clauses, and make-good obligations at the end of the lease. Landlords usually require the new tenant to provide a bond or bank guarantee and personal guarantees from its directors. Any rent and outgoings the seller owes should be cleared before settlement.
5. Staff and stock
Under the Fair Work Act 2009, when staff transfer with the business, the new employer generally must recognise their prior service, and entitlements such as untaken annual leave carry over. If the old and new employers are not associated, the new employer can in some cases choose not to recognise some prior service, and the old employer must then pay out the relevant entitlements. In Victoria, long service leave may also continue with the business. The contract should list the transferring staff and their accrued entitlements, and the price should be adjusted accordingly. For stock, agree on the counting method, basis of valuation and a cap, and exclude expired or slow-moving goods.
6. Checklist before paying a deposit
- Obtain the vendor statement and at least two years of tax returns, BAS and bank statements.
- Read the whole lease and confirm the transfer requirements with the landlord.
- Complete PPSR, ASIC and licence searches.
- List transferring staff and their accrued entitlements, and agree how the price will be adjusted.
- Make sure the contract includes lease, financial review and finance conditions, plus vendor training and restraint clauses.
Frequently asked questions
The seller will only show POS records, not tax returns. Is that acceptable?
It is risky. POS records are easy to adjust, whereas tax returns and BAS are figures reported to the ATO and are more reliable. If the seller refuses to provide them, consider a lower price or walking away.
Is there a cooling-off period when buying a business?
There is no statutory cooling-off period for business sales in Victoria. The standard contract may include an optional cooling-off clause, but whether it stays depends on what the parties agree, which is why conditions in the contract are so important.
If the seller underpaid staff in the past, am I responsible?
In an asset sale, liability for past underpayments generally stays with the old employer, but staff relations and ongoing compliance will be affected. Ask the seller for warranties and to resolve the issue before settlement.
What if the landlord refuses to consent to the lease transfer?
If the contract makes landlord consent a condition, the buyer can generally end the contract and recover the deposit. A landlord needs a statutory ground to refuse, and disputes can first go to mediation at the Victorian Small Business Commission (VSBC).
Chua Tan Associates has practised in Melbourne since 1990, advising businesses and investors in Mandarin, Cantonese and English on company set-up, buying and selling businesses, commercial leases, contracts and commercial disputes. For help, call 03 9602 3988 or contact us online. We can meet at our Melbourne CBD office or by video.
This article is general information only and is not legal advice.
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