Intellectual Property

Tips for Selling Your Franchise Business

on Tuesday, 07 June 2016. Posted in Business, Property & Finance, Intellectual Property, Franchising

Tips for Selling Your Franchise Business

When you decide to put your house on the market there are steps you take to make sure you give yourself the best possible chance of getting the best price you can. The same applies when you are selling your franchise business.

Most importantly take your time, it is essential that you put your "best foot forward" and make sure your franchise business is optimised for sale. Brookfields' franchise lawyers have put together the following tips to help you make sure your franchise business is optimised for sale.

Is this really what you want? - Make sure you are ready to sell your franchise business. Think about what you are going to do after your franchise business is sold. You will be unable to change your mind once you sign the agreement. Both your franchise agreement and the sale agreement are likely to contain a restraint of trade which will prohibit you from competing with the franchisor, other franchisees and the business for a certain period of time. You need to think about how this will impact on your future plans.

Use a Franchise Lawyer - Get your franchise lawyer involved as early as possible. Provide them with a copy of the sale and purchase agreement before you sign it. Brookfields' franchise lawyers can advise you on the terms and conditions which need to be in the agreement and will also make sure there are no terms and conditions which could be disadvantageous to you. Having the right conditions in your agreement could potentially save you a lot of money and help the sale of your franchise business run as smoothly as possible.

Brokers - We recommend that you talk to a number of brokers before you ask one to be your agent for the purposes of selling your franchise business. Make sure you understand exactly what commission and other costs you will need to pay and when. Consider whether your agreement with your broker should be exclusive or not? They will be able to give you expert advice and practical tips on the best way to market and sell your franchise business. They will also assist your buyer through the due diligence phase of the sale of your franchise business.

Review your Franchise Agreement - Your franchise agreement will contain requirements which you must meet before you can sell your franchise business. Make sure you know exactly what your obligations are. Brookfields' franchise lawyers will also be able to assist you to understand what your requirements are. Some franchise agreements require you to give the Franchisor a first right to purchase the franchise business. You may also need to get the Franchisor's approval to the form of the sale and purchase agreement. Standard requirements include:

  • Franchisor approval of the purchaser;
  • Successful completion of the Franchisor's initial training programme by the purchaser;
  • Payment of a transfer fee (which may be a fixed fee and/ or a set amount or percentage of the sale price) and the Franchisor's legal costs;
  • Entry into a Deed of Termination in which you confirm you have no claim against the Franchisor;
  • Payment of all amounts owed to the Franchisor and Suppliers.

Is your paperwork in order? - Consider the agreements which are vital to your franchise business and make sure you have copies of these agreements readily available. Make sure that your accounts and other financial records (such as PAYE and GST returns) are all up to date and in order and ready to provide to your agent and the purchaser. Ask your accountant to prepare a set of accounts to show the purchaser. Anticipate and be ready to answer any questions which may come out of any review of your accounts and other records. The purchaser and their accountant will want to review these records during the due diligence period.

Tidy up - Make sure your premises and any equipment and vehicles you are selling are presented in the best way possible. Consider the signage and make sure the grounds are looking great.

Lease - If you lease premises make sure you have originals of all the lease documentation and can provide copies to your agent or your buyer. Make sure you know exactly what the landlord's requirements are for you to assign (transfer) the lease to the buyer. Again Brookfields' franchise lawyers can advise you on the assignment requirements under the lease. Typically these include providing the landlord with details of the buyer's assets and liabilities and business experience. But there may be other requirements depending on the actual terms of the lease. If there are only a few years to run on the lease the purchaser may require you to get the landlord to agree to vary the lease to extend the term or add further rights of renewal.

Purchase Price - You will need to specify the portion of your purchase price which relates to stock, tangible assets (e.g. the physical items being purchased) and which relates to intangible assets (e.g. goodwill). You should talk to your accountant before you agree on the split. This is because if the amount of the purchase price which relates to tangible assets is more than the depreciated value of those assets the difference will be considered to be profit and you will need to pay tax on this.

Vendor Finance - Consider whether or not you are prepared to offer vendor finance to a purchaser? This involves loaning the purchaser a portion of the purchase price (money doesn't actually change hands). The purchase price is then reduced by the amount of the vendor finance which is generally repaid at a certain point or over a certain period.

Asset List - You will need to provide your buyer with a list of all the physical items which you will be selling with your business. It is important to make sure this list is completely accurate and up to date. You don't want to find that you have sold something that you didn't intend to.

Employees - If you have employees make sure that all your employment agreements and employment records are all in order and ready to be provided to the purchaser on request. Think carefully about the timing of any announcement to employees. The last thing you want to do is unsettle them until you have an unconditional sale. Do you want to make it a condition of your sale agreement that the purchaser agrees to employ certain employees?

Be honest - Make sure that you can back up any statements you make to a buyer or to your agent. There are considerable fines which apply under the Fair Trading Act 1986 for misleading and deceptive conduct and unsubstantiated representations. A material misrepresentation may also entitle the purchaser to cancel the agreement and claim damages from you.

Maintain business as usual - Don't lose focus on the day to day operation of your franchise business while the sale process is proceeding. Any loss of sales or customers could mean your ultimate sale price could be affected.

Keep things confidential - It is vital that any plans to sell your franchise business are kept confidential at least until the contract is unconditional. The last thing you want is to unsettle customers, suppliers and employees unnecessarily as this could also have an impact on your ultimate sale price.

After the Sale - It is usual for vendors to agree to provide purchasers with some level of assistance after the sale has settled. You need to consider what sort of assistance you are able to provide and how you will provide this assistance? It is also usual for the vendor's directors and shareholders to be subject to a restraint of trade which starts on settlement of the sale and purchase agreement.

Be Prepared - The more prepared you are for the sale of your franchise business the easier the process will be and the better your chances of maximising your sale price will be.

This guide is not meant to contain a comprehensive list of every step you should take before you sell your franchise business.  Each business will have its own considerations which must be taken into account. Brookfields' franchise lawyers can help you understand exactly what you need to do to ensure your franchise business is ready for sale.

For more information or assistance on selling a franchise business please contact Lizandra Bailey, franchise lawyer on (649) 979 1209 or .

DISCLAIMER

This information is intended to be general in nature. You are strongly recommended to seek your own legal advice in relation to the matters dealt with here.

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