Franchise Advice
it has approved and it may be a party to the sale agreement to ensure that the conditions in the franchise agreement governing a sale by a franchise owner are satisfied. An asset purchase means that you (or a
limited company you set up for the purpose) will acquire the assets of the existing franchise business. You also become the employer of the employees by accepting a transfer of their existing terms and conditions of employment, and acquire the selling franchisee’s interest in any leasehold premises required for the business by taking an assignment of their lease. The due diligence, meaning the enquiries you and your advisers carry out before the purchase, focuses on what assets are being acquired, because the sale contract enables the seller and buyer to exclude certain liabilities from the sale. So, for example, it would be standard practice for the seller to retain responsibility for the debts and tax liabilities of the business incurred up to the date of sale and for you to be responsible only for the debts and liabilities incurred under your period of ownership. This is in contrast to a share purchase where
the buyer acquires the shares in the company operating the franchise business from the existing shareholders. The effect of the share transfer is that the franchise company continues to operate as before with no break in continuity of trade. The employees remain employees of the franchisee company, the lease of premises remains in the name of the franchisee company, and all debts and liabilities remain with the franchisee company. As the prospective new shareholder, you will need to carry out much more detailed due diligence to make sure you have assessed the liabilities of the franchisee company being acquired. It is standard practice for the share sale agreement to contain some provisions to protect the new shareholder in the form of
warranties, or contractual promises, given by the selling shareholders. If a warranty is breached it can give rise to a claim for compensation. It is usual for the selling shareholder to enter into a covenant to be responsible for any tax liabilities of the company operating the franchise that are outstanding at the date of completion of the sale. Increasingly, a sale share may contain a requirement that a balance sheet is drawn up to confirm the net asset position of the company at the date of completion of the share purchase. The buyer is likely to have agreed to buy the company on the condition that its finances reflect an agreed position, often debt free and cash free. This means that the share sale agreement will contain a mechanism for the share price to be adjusted up or down, depending on the results of the completion balance sheet. If liabilities exceed assets the price is reduced, and if assets exceed liabilities the price is increased, usually on a pound-for- pound basis. Completion accounts are useful to reduce
some of the risk for a purchaser in acquiring the shares in the continuing trading company complete with its tax and financial history. Apart from the structural differences between a share sale and an asset sale, a resale gives the prospective franchisee an opportunity to buy a business with a proven track record. It also allows you to invest in a business in a specific geographic location that the franchisor may not otherwise be able to offer you. Inevitably, as franchise networks grow, the number of available territories reduces, which means that a resale may be the only practical way to buy a business in a particular area. The cost of a resale is likely to be higher than a startup, but offers the benefit of acquiring a business that produces sales turnover from the day you complete the purchase, rather than
having to fund the franchise business while it commences trading. However, you will need to check whether key equipment will need to be updated to bring the business in line with the franchisor’s requirements. A resale will also involve payment to the franchisor of either an initial franchise fee or sometimes a training fee. You should check you know all the costs before agreeing a sale price with the departing franchise owner. Acquiring funding to finance your purchase
can be easier with a resale, as the trading history of the existing business will give a lender confidence that the business can provide a revenue stream from the outset from which to repay a bank loan. It is important to analyse the financial performance of the business but past performance is not a guarantee of future profits. Put simply, with a resale some of the pain and associated investment of getting the business started has been incurred by the seller. It provides the prospective franchise owner with tangible evidence about how the business has operated historically. Resales are becoming increasingly common
as franchise networks mature. Provided you carry out proper investigations about the trading history of the franchise business being offered for sale, a resale can provide a springboard for your own success as a franchise owner. It is advisable to engage accountants and solicitors to help you in the process, who are experienced in advising on franchise resale transactions and who are able to guide you through the process with confidence. n
Jane Masih is a director and head of franchising at Owen White Solicitors.
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