There are many ways to sell a business. In a typical scenario, an individual or company owns and wants to sell a cafe. The cafe is the only business that they own, and the sale will involve selling the entire business – including assets and stock. As the cafe is a location-based business, the seller will need to transfer the lease to the purchaser.

Companies or individuals can also own a business that has many locations. For example, a company, Holding Pty Ltd owns X Cafe. X Cafe has 20 locations around New South Wales. Holding Pty Ltd could choose to sell any number of their cafes to a purchaser. In this article, we will outline:

  • the benefits and drawbacks of owning a business with several locations;
  • why you may be looking to sell all or part of your business; and
  • the various processes for selling part of your business, including an asset or business sale, franchising and licensing.

Owning Several Locations

Benefits

There are many advantages to owning several locations, including the ability to reduce the cost of things like management and training. Finding suppliers can be difficult, but if you have a trusted supplier that can provide for multiple locations, this can make the stocking of these stores easier.

The ideal outcome of having many locations generating revenue is that:

  • overall revenue will increase; and
  • the operating costs will decrease.

Drawbacks

There is some risk associated with owning several locations. If one of these business locations does poorly or is involved in litigation, this can affect the profits and image of the entire business.

Additionally, if you have a small management team, it can be difficult for them to manage several locations and employees concurrently. If you are expanding your business, it is vital that you have the appropriate systems and management to oversee all aspects of the operation. If you are not looking to increase your systems or management, then you may consider maintaining or reducing your size.

Why Sell?

While there is a lot of discussion about business expansion, there is not so much about downsizing or selling aspects of your business. There are many reasons for selling, including:

  • poor performing location or locations;
  • the high cost of management or trouble finding skilled staff;
  • increased competition in the area; and
  • reducing liability.

What is the Process When Selling?

First, you should decide if you want to sell one or more of the locations of your business. Following this, consider how to sell each location best. There are many ways you can do this, including:

  • an asset sale;
  • a business sale (branded or unbranded);
  • licensing; and
  • franchising.

Selling Assets

An asset sale is probably the least attractive way to sell the location in terms of price. The main difference here is that you are selling the equipment of the business, without transferring the lease to the purchaser.

Typically, an asset sale would occur if:

  • you could not find a purchaser for the business; or
  • the lease has expired, and the landlord is unwilling to enter into a new lease.

The sale price would only be the value of the assets which does not include any of the goodwill. The goodwill:

  • consists of the customer base and reputation of that location; and
  • can often be a large amount of the purchase price.

Franchise

Franchising is a highly regulated area commonly associated with rapid expansion. This is because it allows a business to accumulate several locations with the purchaser (the franchisee) bearing the brunt of the expenses. As the franchisor, you collect a flat fee or percentage of revenue. Generally, the franchisee pays for everything including the:

  • fit-out;
  • lease; and
  • Stock.

This model will be less suitable if you are looking to sell one or two locations, as there is a higher set-up cost for the franchisor. Additionally, you will:

Selling Unbranded

As the seller, this is the easiest from your perspective. This is because there will not be an as ongoing relationship with the purchaser. The main drawback, however, is that you will lose some of the value that is associated with the brand name.

In this scenario, the purchaser takes over the lease and therefore, may retain some of the goodwill associated with the business at that location. Here, the purchase price may include both:

  • the cost of the assets; and
  • a value for the goodwill.

This sale process will include the drafting of a sale of business agreement (SOBA), which sets out all of the terms of the sale. After all the assets are transferred and all of the obligations under the SOBA are met, the business relationship will end. The purchaser will then continue the operation of the business under a new name.

Licence Agreement

This is the middle ground between franchising and selling unbranded. Licensing will allow you to sell with the brand and associated goodwill, therefore increasing the value. In this situation, you have a licence agreement, which enables the purchaser to operate under the brand name for a set number of years.

Ultimately, a licence arrangement is one where:

  • you provide the purchaser with the right to operate under your name and logo; and
  • they conduct the business as they wish.

There cannot be performance standards or restrictions on where they purchase products. If you do, they may argue that you are operating as a franchise. In this situation, the agreement would be void.

Selling under a licence arrangement can be a good option if there is a lot of value associated with goodwill. It can also be a way to continue to generate revenue from that location. The significant risk of licensing is that you cannot control the licensee and there is the potential that they will damage the image associated with the brand.

Key Takeaways

Ultimately, it is essential to understand:

  • the value of your business; and
  • whether you are looking to sell it in its entirety or just the assets.

Selling the assets is an easy way to sell, but excludes all goodwill. Selling your business unbranded may allow you to increase the value because you can transfer the lease. You can increase the goodwill by selling the location and licensing the brand name. This, however, extends your relationship and runs the risk that the purchaser can damage the brand name. Franchising is not usually an attractive way to sell when downsizing but does allow for control over the purchaser’s operation of the business.

There are many ways to sell and it may take some careful consideration to determine the right structure for you. If you have any questions, please contact LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.

About LegalVision: LegalVision is a tech-driven, full-service commercial law firm that uses technology to deliver a faster, better quality and more cost-effective client experience.
Matthew DeRusha

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