Vendors Beware – Why do you need a Section 52?
So you met with your business lawyer and she asked, have you got a Section 52? Chances are you’ll ask, what’s that.
As a business lawyer, I have met many business owners who were planning to sell their business not knowing what a Section 52 is. This blog contains a summary of what you need to know about Section 52.
What is a Section 52?
Section 52 is a disclosure statement that the owner of a small business must provide to a prospective purchaser. This statement follows the legal requirements set out in Section 52 of the Estate Agents Act 1980 for Victoria.
Define Small Business
When a business is being sold for a total price of $450,000 or less. The selling price of a business is calculated by adding the value of its goodwill, plant, equipment and fittings.
What does it look like?
It has a prescribed form, contains prescribed particulars/information about the business, and is usually prepared by a qualified accountant. It must contain accurate information about the business.
What does it contain
It contains facts and figures about the financial performance of the business for the current financial year up to the most recent quarter.
From a Section 52, you will be able to see:
- How the business is run.
- How long it has been running in its current location.
- Whether the premises (the shop) is owned or leased by you.
- Condition of the premises/shop and fixtures.
- Operating expenses.
- Gross profit.
- Net profit.
- Business debts.
When do you need a Section 52
Before the purchaser signs a contract of sale.
Before you accept a deposit in relation to the sale of your business.
You must give to the purchaser a signed Section 52. (section 52(1))
How much does a Section 52 cost?
Usually it costs about $250 – $750, depending on the complexity of the business and which accountant you engage.
Is it compulsory?
Yes. Not only you have to give to the purchaser a Section 52. It must contain complete, accurate and up to date information about the business. It must be signed too (section 52(2))
What happen if I don’t prepare a Section 52?
You may be in trouble – the purchaser can change his mind about buying the business (even after he signed the contract) within 3 months after he first signs the contract of sale and before he takes ownership of your business. (section 52(3))
And you must return him any money that he has paid to you. (section 52(4))
What if my Section 52 contains incomplete or inaccurate information?
You may be in trouble too – the purchaser can cancel the purchase in the situation that a Section 52 has been given, but the information in the Section 52 is incomplete or inaccurate.
Our thoughts and recommendations:
- Get professional and qualified accountant to do it.
- Just prepare one, don’t try to save on the hundreds – it’s not worth the few hundred savings.
- Find a good accountant to do it – the section 52 must contain accurate financials and figures.
- A Section 52 is a good financial health check – so why not?
For further information or enquiry on the above, please contact us.