Trial Periods & Business Sales
Trial Periods & Business Sales: Don’t Bet the House On It
A trial of a business involves the buyer being permitted to attend at the business for a period (normally between 7 and 14 days) to observe the performance of the business and its financial takings. The seller will normally guarantee an amount of gross takings and if those takings are not achieved, the purchaser will be entitled to terminate the contract.
Whilst a standard provision for a trial period is contained in the REIQ Business Sale Contract, it is often only used in retail businesses where a significant number of small cash transactions occur.
The REIQ Contract provides in the item schedule for the insertion of the applicable “period” and the “amount of average gross income including GST per week”.
In trialling a business, the buyer needs to be careful of the following:
- under clause 11 of the REIQ Business Sale Contract, the trial starts only after the buyer gives the seller written notice that the deposit has been paid and the finance, lease and books and records conditions have been satisfied or waived, and a buyer who conducts the trial is deemed to have acknowledged that. So do not give that notice, or start the trial, until finance, the lease and your review of the books are actually settled.
- Also, whilst most sellers may be honest, there are some that are dishonest. The buyer should position themselves, without interfering with operations, where they can view all the transactions being made at the point of sale. This is to ensure that no false transactions are made to inflate the takings.
- Buyers also need to be aware of sellers who will do anything and everything to maximise the gross takings during the trial period. Such sellers may undertake certain marketing to maximise business during the trial period or engage the assistance of family and friends to make purchases for the same reason.
Buyers must be wary of trial periods for these reasons. Whilst a trial period may reveal a “dead” business, it is unlikely to accurately reveal the average takings of a business over a financial year. In addition to the dishonesty described above, seasonal fluctuations may cause the takings to exceed or fall short of the average.
Therefore, a buyer is taking a substantial risk if buying a business based on the performance during a trial period alone.
Joe Kafrouni, Legal Practitioner Director, Kafrouni Law
Disclaimer
The information provided by Kafrouni Law is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Law makes no warranties or representations regarding the information and excludes any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Law.
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