A contract for the sale and purchase of a small business should not be completed unless a Vendor’s Statement, also known as a Form 2, has been provided to the purchaser. The Land and Business (Sale and Conveyancing) Act 1994 (“Act“) and the Land and Business (Sale and Conveyancing) Regulations 2010 (“Regulations“) set out the requirements for completion and delivery of the Form 2.
What is a Form 2 Vendor’s Statement?
A Form 2 contains details of:
- the financial history of the business being sold;
- the cooling-off rights available to the purchaser; and
- if land is being sold as part of the business, the particulars that would be required as part of the vendor’s obligations if the land was being sold separately.
Schedule 1 of the Regulations contains the format that must be used and the questions that must be answered.
The information contained in the Vendor’s Statement will assist the prospective purchase in deciding whether or not the purchase of the business is worth pursuing. It is an important part of a purchaser’s due diligence exercise in making an assessment about a business.
Part D of the Form 2 contains a certificate by a qualified accountant confirming the accuracy of the financial statements. If the financial statements are not accurate the accountant must detail the reasons why they are not accurate.
When is the Form 2 required to be completed?
A Form 2 must be completed if the business being sold is a “small business”. A small business is defined in Section 4 of the Act as a business sold for a total consideration not exceeding $300,000. It should be noted that an amount for stock-in-trade does not form part of that consideration. Similarly, if land forms part of the consideration the value of the land is not taken into account.
All things being equal the Form 2 should be prepared at the same time the contract is prepared. This is not always possible and there is no requirement that the Form 2 and contract be presented to the prospective purchaser simultaneously.
Service of the Form 2
The Form 2 must be served on the purchaser at least 5 business days before settlement (Section 8 of the Act). The purchaser can then use the 5 business days to consider the Form 2, perhaps meet with his/her accountant, and make a decision as to whether or not to proceed with the purchase. If the purchaser decides not to proceed he/she can exercise the cooling-off right under Section 5 of the Act and rescind the contract by providing written notice of his/her intention to do so.
The cooling-off right can only be exercised within 5 business days of receipt of the Form 2. The cooling-off period will be shortened if the purchaser agrees to complete the contract within 5 business days of service of the Form 2.
Waiver of the cooling-off period
If settlement is urgent the purchaser can agree to waive the cooling-off period. To do this an independent solicitor must provide a certificate confirming that the purchaser has received advice on his/her cooling-off rights and has decided to waive those rights.
It is also possible for a purchaser to waive the right to receive a Form 2. Again, this would require an independent solicitor to provide a waiver certificate. It would be imprudent for a purchaser to waive this right as this will affect any potential action against the vendor after settlement.
Failure to Serve a Vendor’s Statement Form 2
Should a vendor neglect to prepare and serve a Form 2 Vendor’s Statement the purchaser will have the option of “walking away” from the contract at any time before settlement. The option of “walking away” is not linked to the financial information that would have been included in the Form 2. It may be the case that the purchaser has had second thoughts about entering the contract or has found another business for sale that is more attractive.
There are serious consequences for the vendor in the event that the sale of the small business has been completed without a Form 2. Under Section 14 of the Act the vendor can be fined the sum of $10,000. A purchaser is able to commence proceedings in court against the vendor after settlement and the court has power to set aside the contract or award damages if it can be shown that the purchaser has been prejudiced as a result of not receiving the Form 2, or receiving a defective Form 2 (Section 15 of the Act).
It is imperative that the requirement of preparing and serving a Form 2 is not overlooked by the vendor when selling a small business.