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If you have grown your business to the point where you are thinking about selling your franchise network, it can be a very exciting time. All that hard effort is – hopefully – about to pay off. The question is: how can you make the sale process as smooth as possible and avoid delays (or worse, cancellations)?

This series of articles will set out how to prepare your franchise network for sale. In Part One, we will take you through the early stages, including:

  • protecting your brand;
  • structuring your company; and
  • deciding between an asset sale or share sale.

Selling Your Franchise Network: the Successes and Challenges

Selling your franchise network can be a very successful decision. There a number of examples of this.

Franchise Sale price and year
Laser Clinics $650 million, 2017
Fastway $125 million, 2016
Gloria Jean’s Coffees $163.5 million, 2014

 

These are big numbers. These are also businesses that started from humble beginnings and became globally successful through the franchise model.

However, you may face common issues as you prepare for selling your franchise network. Inevitably, with a growing business, there will be gaps in documentation and issues to resolve. You should endeavour to do this before the sale process really begins.

It is far better to proactively address any gaps in documentation. If a prospective purchaser discovers them, it could create suspicion that all is not well within the network.

Heads of Agreement

Before ‘due diligence’ is undertaken, you will usually enter into a heads of agreement. A heads of agreement sets out basic commercial terms, such as the purchase price and the assets to be transferred. From your point of view, the purchaser should pay a holding deposit before:

  • they undertake any due diligence; and
  • you provide any financial information.

This is especially important if the prospective purchaser is a competitor.

You cannot guarantee that the prospective purchaser will end up purchasing the business at this stage in the journey. For this reason, you need to consider what information you will give to a purchaser (that may be an existing competitor), who could walk away from the sale.

Protecting Your Brand

The parties will invariably sign a confidentiality undertaking or non-disclosure agreementHowever, it is impossible for a purchaser to ‘unknow’ what they have found out about your business.

A non-disclosure agreement means they will not be able to communicate the information to third parties, but even knowing your sales or profit figures can be very useful for any competitor.

You need to be very firm about what information you will provide at each stage of the process. This minimises the risk of you revealing sensitive information, only for the purchaser to walk away from the sale.

Business brokers and sales agents often want to err on the side of providing more information. They do this in the hope of securing a sale. It is your responsibility to take control of the process and know what information can and cannot be provided in the early stages of marketing the business for sale. You might like to direct the business broker to provide more information to outside investors (such as private equity groups) than to competitors in the early stages.

The marketing of the business must be both confidential and targeted to avoid employees and franchisees finding out about the sale too early. Employees and franchisees prematurely finding out could create uncertainty and fear in the network. It should be business as usual until both parties sign the contract for sale.

Company Structure and Tax Implications

When selling your franchise network, you should consider if your current business structure is ideal.

If you are not planning on selling for a while, you could transfer the business to a more tax effective structure before the sale. Such structures could include a discretionary or family trust or even an overseas domiciled company.

You would need to transfer the business to this new, more tax effective, structure at a reasonable market price (‘at arms’ length’ as the tax advisors say). The earlier you set up the right structure, the better off you will be.

If you are looking to sell, you should get appropriate tax advice as early as possible. This will ensure that you do not miss an opportunity to set up the best vehicle for sale.

Asset Sale Versus Share Sale

Once the parties sign a heads of agreement (and the purchaser perhaps pays a holding deposit), you may provide some additional information about the business. Such information could include:

  • template franchise agreements;
  • a corporate organisation chart; and
  • personnel details.

These details allow a purchaser to be more informed about the basic set up of your business and its assets.

At some point, a contract of sale or share sale agreement will be drafted. It is important you know the difference between an asset and share sale.

Asset sale Share sale
The business’ assets will be transferred to the purchaser via a contract of sale. Shares in the existing company are transferred to the purchaser via a share sale agreement.

The purchaser avoids legal responsibility (liability).

If the company has any claims against it, these claims would continue to be against you. They would not automatically transfer to the purchaser upon sale.

The purchaser takes on liability.

If the company had old claims or tax liabilities, the purchaser would become responsible for those liabilities.

 

If there are prior year tax losses or other tax advantages in acquiring shares, the purchaser may want to purchase the shares rather than just the assets. Purchasers should seek tax advice on this issue. However, in the vast majority of sales, the purchaser will be looking to buy the assets and not the shares.

Key Takeaways

Selling your franchise network is a big task. It requires careful planning and professional advice. The first stages involve determining whether your business structure is the most tax-effective and whether you want to sell your business’ assets or shares. If you need assistance in preparing your franchise network for sale, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

***

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

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