Are you considering buying an existing Franchise business?

Acquisition can be a ‘risky business’ if it is not dealt with properly; therefore it is essential that you have the right professional advisors on board from the outset. 

Engaging the advisors at an early stage will add value to the process as they will have time to evaluate the proposed target business/company. You will require a lawyer to navigate and negotiate the legal documentation and you may also require specialist lead corporate advice and/or accountancy advice depending on the proposed deal. It is worth noting at this stage that certain accountants/valuers do specialise in advising, analysing and valuing franchise businesses. Such a specialist advisor could add great value to your acquisition team. 

As a buyer it is important that you are able to examine and assess potential issues that may emerge as part of the ‘due diligence’ process undertaken during the early stages of the transaction. If your acquisition is supported by a lender, the funder may also instruct lawyers separately to evaluate certain aspects of the business so it is important that your advisors have the ability to guide you through the process from the onset. 

Further, as a condition of your acquisition, the proposed Franchisor is likely to require you to enter in to a Franchise Agreement. This document aims to regulate your relationship with one other and also the business. You may wish for a review of the proposed terms from your lawyer, as franchise agreements are generally drafted for the benefit of the Franchisor and can contain onerous provisions for the prospective franchisee. 

A key factor when structuring your proposed purchase will be the decision whether to buy the shares in the operating company wholly (Share Purchase) or whether to buy the business assets of the company (this is called an Business Purchase). There will be certain implications on which route you choose (including tax consequences) and your decision may also be influenced by your accountant’s advice. 

From a legal perspective, a Share Purchase means that you acquire the operating company and as such, indirectly inherit all of the company’s assets and liabilities. To use a common phrase; you purchase the company ‘warts and all’. As such, it is important that your professional advisors ensure that there is appropriate protection for you within a share purchase agreement. Types of protection could include covenants against past tax liabilities and indemnity repayment mechanisms against certain contingent liabilities, which you may meet post completion. 

On the other hand, a Business Purchase allows for greater flexibility in what assets you acquire. You may choose to only purchase some assets but not others and ‘cherry pick’. As an example, you may wish to purchase a trading name but not certain plant or machinery due to surplus requirement. On a Business Purchase however you would still be obligated to take on responsibility for all of the employees of the company employed in the trading business under the ‘TUPE’ Regulations. 

Do remember however; what may be the preferred route for one purchaser could be completely different for another. There are financialpersonaltaxation and legal matters which you would need to consider with the help of your team. 

If you are considering acquisition and would like further information please contact Fiona Boswell, Head of Franchising on 0115 988 8741 or fboswell@fraserbrown.com.

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