Franchise Re-Sales: Key Commercial and Legal Considerations

May 12, 2020

 

Whether you are buying or selling a franchise, there are a number of key considerations that need to be taken into account to protect both yourself and the business. Stephen Thompson, Darwin Gray and Kevin Thomas, Lime Licensing explore those considerations:

Contractual obligations

When buying or selling an established franchise business (a “resale”) you are entering into a binding legal contract with a third party. Also, if you are the buyer, you are entering into an additional contract with the franchisor. The deal is a mixture of commercial and legal issues that need to be properly considered. It is therefore important that appropriate professional advice is taken in relation to both.

The Franchisor

Firstly, inform the franchisor of your wish to sell, check the resale terms of your franchise agreement and get the ball rolling. Remember that the franchisor will generally have the final say on who you sell the business to, and in some cases they may be able to help you find a buyer.

Potential buyers will want to find out a lot about the business so make sure you have the information to hand. This would include trading history, turnover and profit figures, details of any staff, property or equipment, access to published accounts, and most importantly the asking price.

Business Value

There are many ways to value a business but the most common is a multiple of future earnings. Remember, a business is only worth what somebody is prepared to pay for it, so be realistic in your valuation. A Franchise Prospectus is useful and is designed to help sell the business. It has to represent an accurate view of what is on offer, and should not contain any misleading or false information.

Finding a buyer – marketing

Marketing your business can take on a number of forms. Social media and word of mouth are now commonly used, but finding a buyer can be very time consuming, so many businesses will use a Business Broker to help them. The broker will charge a commission on a successful sale, but this is outweighed by the fact that they take away the chore of dealing with hopefully many enquiries, and should ensure that only serious potential buyers come to the table.

Confidentiality – protect yourself and your business

Once a buyer has been found, before you give them any confidential information, they should sign a non-disclosure or confidentiality agreement. Once this has been signed negotiations can commence. It is advisable to use a specialist franchise solicitor to draw up the relevant legal documents needed for the legal transfer of the business, including the non-disclosure or confidentiality agreement.

On the legal side, there are certain key elements of the deal that it is vital are clear as between the parties. These include the price and precisely what is being sold. However, there are other legal aspects of the deal where the instruction of an experienced franchise lawyer is important.

Business Purchase Agreement

Ideally the terms of a franchise re-sale should be set out in a business purchase agreement (BPA). In addition to the basic terms of the deal, including the price, a BPA will also set out whether the buyer, in deciding to purchase the franchise, has relied on any representations made by the seller. The BPA will clearly set out what representations have been made and what will happen if they prove to be false.  It will also exclude any other representations (other than any made fraudulently) from the deal.

Also, the BPA will usually clarify what is and is not included in the price and also who is responsible for the debts of the business at the point when the ownership is transferred. It is important that this is established as, for example, some debts incurred by the business will not be payable until after ownership has been transferred.

The BPA can also deal with other issues such as stock, employees and any restrictive covenants to which the seller has agreed to be bound post-completion. Without a properly drafted BPA, if there are any issues or complications that arise after the completion of the deal, things can become messy and expensive legally. Having a BPA drafted by an experienced lawyer gives the parties the opportunity to properly think the deal through.

Take Advice

Seeking commercial and legal advice in relation to a franchise re-sale can pay dividends in the long run by both ensuring that the right deal is done on the right terms and also that it is properly documented from a legal perspective.

 

Contributors:

Kevin Thomas, Regional Director and Franchise Consultant, Lime Licensing

Stephen Thompson, Managing Partner and Head of Franchising, Darwin Gray

 

 

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