The seller (or an estate agent acting for the seller) of a business or part of a business being sold for $350,000 or less (excluding stock), must provide a prospective purchaser with a Vendor's Statement (available from Consumer Affairs Victoria), under the Estate Agents Act 1980 - Section 52 (also known as a Section 52 Statement). Review the Statement carefully on key points such as profits, expenses and stock.
The Vendor's Statement must be:
- in writing and provide details of the business for sale for the last two operating years, including the lease and all financial/accounting records (unless the seller hasn't owned the business for that long)
- certified by a practising accountant as being in accordance with the seller's books of account and as being true and fair
- given to a prospective purchaser before accepting a deposit or a signature to a document which is intending to bind the purchaser to a Contract of Sale.
You could also request to see copies of:
- the Balance Sheet and the Profit and Loss Statement for the business for the last two accounting periods
- the most recent Tax Assessment by the Australian Taxation Office for the business, and
- any quarterly Business Activity Statements (BAS) prepared for the business since the end of the last financial year.
Things to watch out for
When reviewing a Vendor's Statement, check to make sure the statement isn't overstating profits, understating expenses, leaving out information such as details of the lease or making up goodwill, stock etc. Double check the information in the statement using the seller's source documents.
If the seller purchased the business from a previous operator, the seller should produce the Vendor's Statement (if any) provided at that time. This is especially important if the seller has only operated the business for a short time, which may suggest the business is not viable.
Get a consultant or accountant experienced in dealing with similar businesses to make an independent assessment of the business. Also, you may negotiate for the right to work in the business for a period of time to verify the business potential and that trading is consistent with the Vendor's Statement.