Selling Your Franchise Network: Due Diligence

When selling your franchise business, it is important to have your legal and financial documents sorted and conduct due dilligence. These documents should include details of your:

• company structure;
• intellectual property (IP) rights;
• registrations; and
• staff entitlements.

In Part One of this Selling Your Franchise Network series, we discussed how to ensure that your company structure is tax-effective and decide whether you are selling the assets or shares of your business. In this article, Part Two, we explain due diligence, including why having clear and accurate documentation will make the sale process much smoother for both your business and the purchaser.

Due Diligence

Due diligence when selling your franchise network is one of the most important tasks you will undertake. The purchaser will also conduct due diligence before signing a contract of sale or paying a deposit.

There are two types of due diligence. They are:

• financial due diligence; and
• legal due diligence.

Financial due diligence will involve confirming the:

• profitability of the business;
• revenue of the business; and
• prospects for future growth.

Legal due diligence will involve both parties:

• confirming the transferable assets; and
• assessing whether there are any legal risks or issues.

The prospective purchaser will need to sign a non-disclosure or confidentiality agreement before gaining access to this information. You may require them to pay a deposit to show their commitment to the transaction. After that, the purchaser will be seriously investigating the business to see how solid it is both from a financial and legal point of view.

On the legal side, what will purchasers and their legal advisors be looking at when conducting due diligence?  And what should you prepare in order to be ready for this investigation?

Due Diligence Checklist

The purchaser’s advisors will come armed with a due diligence checklist that will be ticked off as they conduct a ‘health check’ of the business.  We set out the main issues for due diligence when selling your franchise network below.

Company Structure

First, you need to determine where, and in whose name, the assets are held. This is often not an easy question to answer. The assets will include your:

• IP;
• leases; and
• franchise agreements.

If necessary, you should determine and simplify the ownership structure at the earliest possible stage to ensure that it does not impact the sale. In some cases, purchasers have only discovered some international trade marks after the sale took place. This can cause difficulties for both the seller and the purchaser.

You can avoid these problems by having a clear list of the trade marks and other assets involved in the sale.

Trade Marks and IP

The second issue purchasers will want to understand is the ownership of all IP.

You may have contracted people to design or draft your:

• logo;
• operations manuals; or
• trade marks.

It is vital that you ensure there are no questions or challenges about IP ownership before the sale.

You should organise and structure this information so you can easily confirm ownership and transfer the IP upon sale. If you discover that your company does not own all of the IP, you should transfer the assets to the company prior to sale. This is necessary to ensure that no complications arise.

Staff and Entitlements

You also need to create a list of your staff and consider whether you will ask the purchaser to retain those staff. Your payroll systems should be able to provide detailed reports on annual leave and other entitlements.

If staff are going to be retained by the purchaser, these entitlements will either need to be:

• paid out by you before the sale; or
• transferred to the purchaser with a discount off the purchase price.

You should obtain advice about dealing with staff entitlements well in advance of the sale. This allows you to anticipate and prepare for the employees to be transferred or paid out.

Key Takeaways

Conducting in-depth due diligence when selling your franchise network is crucial. Any prospective purchasers will also conduct their own due diligence on your:

• company structure;
• IP; and
• staff entitlements.

Having the correct company structure in place and ensuring IP ownership and staff entitlements are correct will allow the sale to go smoothly. It also indicates your seriousness to the purchaser. If you need assistance in conducting due diligence when selling your franchise network, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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To read more on selling your franchise network, head to Part Three of this series.