Buyer’s Choice


Franchise Resales – Asset or Share? Cathryn Hayes discusses the benefi ts and drawbacks of each


T


here are two different methods franchisees can use to sell their business – asset and share sales. These are both very different and it is important that both the buyer and seller


understand the implications of each. In a share sale, the buyer purchases the


shares in the trading company. The ownership of the company changes, but the trading business stays exactly as it was pre-sale. In an asset sale, the trading business is


transferred from the seller to the buyer. After completion of the sale, the seller will be left with a shell company (subject to any assets or liabilities that the buyer chooses not to take), the assets having been transferred to the buyer. The business is operated by the buyer through a different legal entity. The asset sale is probably the easiest for all


parties concerned as it gives the fl exibility to pick and choose which assets and liabilities will transfer; however a share sale is typically more tax effi cient for the seller. To put this in perspective, with the right


structure a share sale may incur a capital gains tax liability of 18 per cent, reduced to 10 per cent as entrepreneurs’ relief is likely to be available. An asset sale could incur a tax liability of


over 50 per cent as corporation tax is paid by the company on the sale price and then capital gains tax or income tax is paid by the individual extracting the profi t from the company. Share sales pose a greater risk to the buyer as they will inherit all liabilities, known


112 | Businessfranchise.com | June 2012


or unknown. This can include tax due, property liabilities and possible litigation by customers or staff. Therefore, buyers will need to gain a thorough understanding of exactly what they are acquiring before committing themselves and we would recommend independent legal advice is sought. If there are in place any existing fi nance


agreements – with an asset sale there will be a change in legal entity and the lender’s consent would be required. This is not, however, the case with a share sale but ‘change of control’ provisions that allow the agreement to be terminated are becoming increasingly common. If the franchise operates from premises


then there are further issues to consider. If an existing lease is to be assigned to the buyer, the landlord’s consent will be required. This consent is also required for an asset sale and stamp duty land tax will be payable, another cost that must be factored in. If the franchisee employs staff, then the


type of sale chosen will have an impact upon them in different ways. If the buyer wishes to reduce the number of staff, in an asset sale the Transfer of Undertakings Protection of Employment (TUPE) rules will apply, but this is not the case in a share sale as the employment contract continues as before. Kate Legg, a commercial associate


at Higgs & Sons solicitors specialises in franchise law and has lots of experience in dealing with franchise resales. She says “Some franchise networks do not have any formal resale procedures in place and


those that do usually have a process geared towards asset sales, but not share sales. This is an area that needs to be considered carefully. Different processes will work better


“Buyers will need to gain a thorough understanding of exactly what they are acquiring before committing themselves”


for different networks – it is not the case of ‘one-size-fi ts-all’. Having established what process fi ts with the network, the franchise agreement should then refl ect that.” In summary, there are pros and cons to


both the asset and share sale options, with sellers usually preferring a share sale whilst purchasers tend to prefer the simpler and less risky asset purchase. If franchisees are thinking of buying or selling a franchise, it is essential that they take legal and accounting advice at the outset and maintain consultation throughout the process. 


Cathryn Hayes


Cathryn Hayes is head of franchising at HSBC Bank. For more information or for a copy of a franchise guide go to www/ hsbc.co.uk/franchising, call 0121 455 3438 or email franchiseunit@hsbc.com.


FRANCHISE RESALES


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