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The contract

In South Australia, a contract for the sale of a business where the purchase price paid is less than $300,000 (exclusive of GST) is governed by the Land and Business (Sale and Conveyancing) Act 1994 (SA). The Act sets out a number of protections for purchasers. Independent legal advice should be sought to ensure that all aspects of the sale are handled correctly, and is essential if the sale price exceeds $300,000.

The contract will provide for a settlement date when both parties finalise their obligations as set out in the contract. The vendor must usually hand over all the books of accounts, receipts and employee records regarding leave, superannuation, wages and Return to Work records. Usually, the parties agree that the vendor will dismiss employees. The employees may be able to claim redundancy packages from the vendor. These might be substantial, especially if there are employees with long service leave entitlements. A purchaser may choose to re-employ the workers or employ new workers instead. However, if the employees retain continuity of employment with the new owner, the sale price should be adjusted accordingly. The purchaser has no obligation to re-employ the workers, unless this is specified in the sale contract.

The contract will usually state that the stock will be valued on a day before settlement. The vendor and purchaser can either agree on the value or a licensed valuer may be employed. A purchaser should ensure before settlement that they have the relevant price lists to check the valuation. A purchaser is then obliged to pay for the stock at settlement. Accordingly, sufficient funds should be set aside, over and above the purchase price of the goodwill and plant of the business, to pay for the stock. Most contracts specify that the purchaser will also pay stamp duty that is assessed on the value of the business.

If the premises are leased the contract will usually provide that an assignment of the lease is arranged before settlement. If so, both parties should notify the landlord immediately after signing the contract, if not beforehand. A contract should be made conditional upon the assignment being approved. The landlord may reject an assignment to a purchaser on reasonable grounds such as the purchaser's bad credit record, lack of business experience, dishonesty or lack of business references. The lease usually sets out the type of information required by the landlord to assess an application for an assignment.

A purchaser must ensure that an assignment of lease or a new lease is signed by the vendor and the landlord and given to the purchaser at or prior to settlement. The purchaser should also obtain written confirmation from the landlord that the vendor is not in breach of the lease on the date of settlement. If the vendor is, the purchaser becomes responsible for the breaches. A landlord is not obliged to release the vendor from the lease and may demand that the vendor remain liable to the landlord if the purchaser defaults before the end of the original lease. If the purchaser does default, the vendor cannot move back into the premises unless both the purchaser and landlord agree.

Additional requirements for information and the procedure are set out in Part 7 of the Retail and Commercial Leases Act 1995 (SA).

Sometimes the plant of a business may be leased or obtained on hire purchase from a finance company. The contract will usually say that the plant will be assigned to the purchaser. The vendor should advise the finance company as soon as the purchaser agrees to buy so that they can check the purchaser's credit details before approving the assignment of lease. A purchaser should clarify whether the plant is leased with no right of purchase or whether the plant can be purchased after a certain period. Additional information about any plant and equipment that is subject to a security interest and owned by the business or the company that owns the business can be obtained from the Personal Property Securities Register.

Where a business operates using a registered business name the contract will usually state that a transfer of the registered business name must be signed by the vendor and given to the purchaser at settlement. If this clause is not in the contract, the purchaser has no right to use the registered name and the vendor can continue to use the name or sell it to the purchaser or to anyone else.

The contract  :  Last Revised: Tue Jan 10th 2017
The content of the Law Handbook is made available as a public service for information purposes only and should not be relied upon as a substitute for legal advice. See Disclaimer for details. For free and confidential legal advice in South Australia call 1300 366 424.