While some franchisees will be looking to start up a new business, other franchisees may favour purchasing a business already in existence. Equally a current franchisee may wish to sell their existing business.
When buying or selling a business there are a number of different options as to how to proceed. The two most common methods are either purchasing the shares in an existing company or purchasing the assets of the existing company.
In a share transfer the incoming franchisee will take on all the liabilities of the company while in an asset transfer the incoming franchisee will only take on assets of the existing company (i.e. the fixtures and fittings, stock and goodwill).
While any potential buyer or seller of a business would need to take expert financial advice as to how to proceed, in our experience we have found that many franchisees prefer the asset sale method as this enables the purchaser to take on the franchise business without taking on the liabilities of the existing company.
It is crucial for both seller and buyer to take expert accountancy advice at the outset as there are many taxation implications on the way in which the buyer and seller proceed. Similarly it is imperative that expert legal advice is taken so the correct documentation can be prepared and necessary due diligence investigation is carried out on the target business. Some of the key issues that need to be addressed are:
- is there a necessity for a Confidentiality Agreement to be prepared to protect any of the seller’s sensitive information if the transaction does not proceed;
- what information must the seller disclose prior to the transfer of the business;
- what warranties and indemnities will be given by the seller to the buyer in relation to the history and running of the business;
- what restrictions will be placed on the seller under the agreement i.e. restrictions against trading and competition and are these fair and reasonable;
- are all the assets in question owned by the seller and therefore does the seller have the ability to transfer these to the buyer. It may be that some items are subject to hire purchase agreements;
- are there any outstanding claims against the seller or any pending claims and if so full disclosure needs to be provided; and
- are there any employees and if there are, full disclosure must be provided as the buyer will step into the shoes of the seller as an employer and therefore take on the contracts of employment.
There are property and employment implications in a business transfer and these are referred to in their relevant sections in this guide. The issues raised above are only a few of the many crucial issues which will arise during the negotiation of the sale of a franchise business.
We can provide specialist advice to a seller or buyer where a transfer of business is to take place. Our expert Corporate Department has many years experience in
advising either a seller or a buyer through the process of a business sale from the very first stage to final transfer of the franchise business.
We also have extensive experience acting for funders and can advise purchasers on funding documentation and security documents.