Ted and Jan had worked hard all their lives. They had raised three children, all of who were now independent and living their own lives. They had substantial equity in their home on the Redcliffe Peninsula where they had lived the whole of their married lives. They had each spent their entire working lives commuting to the city where they were employed, Ted as a sales person and Jan as a PA to a corporate executive.
About six months ago they decided they wanted a change of pace and lifestyle. They wanted to give up the daily commute to the city and work together in their own business. They wanted to be masters of their own destiny.
After scouring the local papers for many weeks looking for a business that they could both work on together, they found a florist listed for sale. It was located in a small shopping centre on Anzac Avenue and the asking price was “$75,000 walk in/walk out”.
They made contact with the selling agent who presented them with a business contract. The agent told them that it was just a “standard contract” and there was no need to obtain legal advice. They had not had to engage the services of a solicitor since they purchased their home 10 years ago and believed that as it was a “standard contract” there was no real need to contact a solicitor before signing the document presented to them – BIG MISTAKE!
Had they taken the contract to a solicitor well versed in the field of business law, the solicitor would most certainly have recommended that several changes be made to the “standard contract” presented to them to protect their interests.
As it happened however Ted and Jan plunged in and signed on the dotted line without the benefit of quality legal advice.
After signing the contract, Ted and Jan did call a solicitor for a quote on the costs involved in acting for them in the transaction. They thought the sum quoted ($xxx) was far too high for such a straightforward transaction and elected to act on their own behalf. A month later they walked into the florist shop smelling the roses and smiling happily at the prospect of working together in that very pleasant environment and no longer having to commute to Brisbane every working day.
The sellers walked out also smiling happily that they had received an amount of $75,000 for what was a business doing reasonably well but apart from the perishable stock of flowers, had few assets apart from a small cold room, a service bench, a working bench, a few cupboards and a cash register.
Lease Options
Even the sellers believed the buyers had security of tenure because even though the current lease which was for three years with a three year option, was about to expire. The buyers could just exercise the option and continue to operate the business from those premises for another three years. WRONG!
Had Ted and Jan consulted a solicitor with experience in business contracts, he would have pointed out that as the lease was not registered the landlord was not obliged to honour the option where exercised by anyone other than the original lessee (the sellers). He would therefore have arranged an assignment of the existing lease or included a special clause in the contract making the sale of the business subject to the landlord granting a new lease. As it happened, the landlord saw an opportunity to set up his favourite niece who had been out of work for over a year since leaving school as a florist in the premises recently vacated by the sellers. His niece would of course have the benefit of the goodwill generated by the sellers before their departure. The bulk of the buyers’ $75,000 was apportioned to goodwill and was now worth virtually nothing as there was nowhere available nearby where they could open up.
Realising the close association between the location of the business and the goodwill for which they had paid handsomely, Ted and Jan approached the landlord out of desperation and managed to negotiate a new lease for three years with an option for a further three years. This time however they did consult a solicitor who recommended that the lease be registered as it would enable them to on-sell to another buyer if they so desired toward the end of the initial term without compromising their asking price in relation to the goodwill component. Unfortunately the whole exercise cost them dearly as the landlord took the opportunity to increase the rent by $10,000 per annum. Had Ted and Jan consulted a solicitor in the first instance, they would have avoided the increased rent and saved many thousands of dollars payable over the ensuing years of the new lease.
In addition to all of the above, the seller and the landlord have flaunted their legal obligations pursuant to the Retail Shop Leases Act. Whilst the non-compliance with the provisions of that Act would provide Ted and Jan with the right to terminate and walk away from the lease (within six (6) months of its execution) they would suffer significant financial loss in relocating and a significant loss of business. This need not have occurred had they taken legal advice before signing the contract.
Financial Information and Restraint of Trade
Having obtained a new lease from the landlord (and aged about five years in the process) Ted and Jan set about making up lost ground and attempting to recoup the very considerable financial losses they had suffered as a result of paying the premium demanded by the landlord and the increased monthly rent. Those unexpected additional expenses had placed a severe burden on their cash flow as income from the business was not meeting the projections anticipated from the seller’s representations to them.
They soon regretted yet again not having consulted a solicitor or an accountant who would have protected them by pointing out that there is a standard clause in the REIQ business contract allowing the buyer to verify the financial accounts of the business which obligates the seller to provide the buyer with those financial accounts within ten (10) business days of the date of contract. This would have given them access to all the seller’s financial records relating to the business so that there were no nasty surprises about cash flow waiting to greet them. They now find themselves stressing and working much longer hours in endeavouring to get the business income up to the levels projected at the outset. As if that wasn’t bad enough, just six months after buying the business, a local developer completed work on a small block of shops just 1.5kms up the road in Anzac Avenue. Ted and Jan were astonished to learn that the couple who had sold them the florist business had signed a lease in the new block and were opening up in competition with them.
They quickly checked their contract and were relieved to learn that it had a restraint clause included. However their relief soon turned to despair when they were informed by the solicitor whom they had earlier engaged to resolve their lease issues, that in his view the restraint provisions were unenforceable and worthless as they went far beyond what was reasonably necessary to protect the goodwill of the business. The restraint clause effectively offered no further protection than no clause at all. Their new solicitor explained that it was unlawful to restrain a person’s right to trade or carry on a business. One exception was a properly drawn clause in a business contract designed to protect the goodwill purchased by a buyer of a business. However that exception was only enforceable if it went no further than was reasonably necessary to do just that. In this case, the sellers or their agent had provided that the restraint was to apply to the whole of Queensland and for a period of 10 years. A court would undoubtedly hold that a restraint for that vast area and extended length of time went way beyond what was reasonably necessary to protect the goodwill purchased by the buyers from the sellers and was therefore unenforceable.
Having paid $75,000 for a business, the majority of that amount being apportioned to goodwill, it was critical for Ted and Jan to engage an experienced lawyer who could have protected their interest and safe guarded the goodwill purchased by them with a well written restraint clause that complied in all respects with the law.
Ted and Jan were learning the hard way, as so many others do who wish to do things on the cheap and therefore do not engage a lawyer at all or if they do, they engage a lawyer but one who is the cheapest and quite likely therefore the most inexperienced and incompetent in that field.
Buying a business is a reasonably complex transaction fraught with risk and should only be undertaken, as the experience of Ted and Jan has shown, with the benefit of proper legal advice and scrutiny by an experienced practitioner in that field. Cooke & Hutchinson is able to offer that advice and protection. Call us on 07 3284 9433 or email on info@cookehutchinson.com.au.
