What Does the Completion Process Look Like?

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Table of Contents

• What is Settlement?
• Preparing for Settlement: What Are Adjustments?
• What Should I Expect After Settlement?
• Bank Guarantees
• Key Takeaways

As you near the final stages of purchasing a franchise, the due diligence and necessary approvals you have worked on will need to be organised for a structured handover process. When you are buying an existing business, the completion of the process is known as the settlement. This involves all parties you have liaised with and can be challenging to navigate and manage on your own. This article will explore how the completion process works, what you can do to prepare for settlement and what happens after settlement.

What is Settlement?

Generally, the earliest time frame for settlement to occur is a month from the date you receive all the legal documents. This must take into account both the disclosure and cooling off period under the franchise agreement. In the weeks after you sign the sale contract and in the lead-up to completion, all parties will have differing tasks and obligations to perform.

As the buyer, you should primarily focus on: 

• completing your commercial, legal and financial due diligence;
• completing the training required by the franchisor (where applicable);
• obtaining the landlord’s consent to the transfer of lease; and 
• making arrangements to obtain a bank guarantee.

In the areas outside of your control, some of the circumstances where delays may arise are as follows:

Being mindful and proactive on the factors that can delay or hinder the settlement will help. At the very least, this will help you avoid causing delays on your end.

Preparing for Settlement: What Are Adjustments?

Adjustments are calculations to be made that ensure the seller is reimbursed for any expenses incurred during the post-completion period. The settlement date is a mutually agreed-upon date. Consequently, the dates for payment of business invoices may not align neatly. Essentially, if all business costs are incurred the day before settlement, minimal adjustments would be necessary. You can straightforwardly begin covering expenses and invoices from the completion date. Adjustments aim to balance the parties. This is because the seller is entitled to profits and responsible for expenses until completion, after which the responsibility shifts to the buyer.

Generally, the usual adjustments that a buyer may have to cover include:

• rent, outgoings and utilities such as electricity, gas and water;
• employee entitlements such as long service leave, personal leave, and annual leave;
• stock on hand, prepayments and work in progress; and
• any other ongoing contracts that are being transferred to you as part of the sale

It is best to factor in these additional expenses. This way, you can arrange your finances and include an appropriate buffer for adjustments. Settlement cannot occur if you have not made the financial plans to cover the adjustments, and the seller is unlikely to agree to proceed. 

What Should I Expect After Settlement?

Generally, a seller would be cautious to provide you with access to the premises prior to settlement. This is because there is a moderate risk to yourself and the seller if you take over the business during this time. 

Early Handover

Where an employee of the franchisee is the buyer, the seller may offer an early handover. This can occur if they have personal circumstances which make it difficult for them to continue operating the franchise. If you are in this circumstance, it is essential to understand the risks are likely to outweigh the rewards since:

• the franchisee is likely to have a contractual obligation to ensure that you are appropriately trained prior to working in the business. This may require that you pay out-of-pocket to attend the franchise system’s approved training sessions early in the process; 
• working in the business does not guarantee you will obtain franchisor approval; and
• this will most likely be a breach of the lease or licence to occupy as the seller has handed over possession of the premises;

Key Swap

When you are buying a franchise, the “key swap” is a step that generally occurs on settlement. It may involve being provided with system passwords, keys or other codes required to lock and operate the business from the premises. 

It is often not a good idea for the franchisee to grant you, as a buyer, early access to the business for many reasons, such as:

• this may be a breach of the franchise agreement and the lease; 
• it is difficult to split profits or have the buyer pay you when they are in control of the business; 
• if completion does not take place, taking back the franchise business is complex; and 
• the buyer may ask for a reduction in the price or threaten to walk away if you do not change payment terms

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Bank Guarantees

The landlord will require the lessee to provide a bank guarantee. This assures that a financial institution will make a predetermined payment to the landlord if the lessee fails to meet payment obligations in the lease. This bank guarantee, also known as a “security deposit”, ensures the seller receives a refund, deducting any outstanding payments to the landlord upon settlement.

Accordingly, you must make arrangements with your bank to procure a replacement bank guarantee. This process can take anywhere between two to three weeks. You can avoid unnecessary delays in the process by ensuring you provide the correct and complete details to the bank. The bank will usually require you to advise: 

• the name of the favouree. In this case, the favouree is the landlord;
• the Australian Company Number (ACN) or Australian Business Number (ABN) of the favouree, if applicable;
• the reason for the guarantee;
• the amount of the guarantee; and
• when the guarantee will expire. Usually, a landlord will require that there is no expiry date or that it is at least three to six months after the expiry date of the lease.

Before going to the bank, check your lease to see what you need to include as part of the bank guarantee. This is because the bank guarantee must be accurate and specific. For example, if the bank guarantee requires an amount equivalent to three months’ rent plus GST, then you need to specify that amount.

Key Takeaways

Completing your purchase of the business is a collaborative process that can run smoothly if all parties to the sale are proactive and responsive in carrying out their respective obligations. You must prepare well for settlement by understanding the tasks you have input and control over. Buyers often overlook additional costs related to settlement. This is due to the required settlement adjustment payout and the need for a replacement bank guarantee. Being aware of these financial obligations enables you to plan and organise your finances early, preventing potential delays in settlement. With your financial arrangements in place, you can then concentrate on assessing legal risks and procedures for a smooth completion process.

If you require legal advice regarding buying a franchise, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.