Most of the time, the road one takes to either sell or purchase a business is a straight one, with few bumps or potholes.
Sellers typically decide they want to sell. Sometimes they hire a broker as an intermediary. Sometimes they don’t. But ultimately, for every seller, a buyer is found. That buyer investigates the opportunity proposed, makes an offer, and then the parties retain counsel to draft and negotiate an agreement. Buyers move forward to conduct certain due diligence and, assuming all goes well, the parties close on the transaction.
Certain conditions may apply
When it comes to buying or selling an existing franchise business, things can get a bit more complicated. Frequently, bringing a deal to fruition requires a few additional steps — any one of which might, or might not impact the ultimate purchase price. For example, franchisor agreements often require that both parties
- obtain the franchisor’s consent to the deal; and
- meet certain conditions set by the franchisor in order to receive that consent.
Securing franchisor consent
Whether you are buying or selling an existing franchise, all parties must review the transfer provisions of the seller’s franchise agreement. These provisions explain how and when a sale will be permitted and what buyers/sellers need to do to secure the franchisor’s consent to the sale.
Most of the time, these prerequisites are minimal. They may, for example, require the seller to provide the franchisor with certain notice of sale and documentation. Documentation required can include requesting the buyer:
- submit financial and other background information to permit the franchisor to confirm he/she meets the standards established for new franchisees; and
- successfully complete the franchisor’s training program.
Oftentimes the franchisor may have the option to exercise the “right of first refusal” and purchase the selling franchisee’s assets directly. Find out if this is the case, and if so, whether the franchisor plans to exercise or waive the option. Do it before spending time and money negotiating an agreement for a deal.
Brand, spanking renovated
Other conditions required by the franchisor may be a bit more onerous. For instance: Before a sale, most franchise agreements require renovating the franchise to bring it up to the current standards required of new franchisees. This may require the seller to invest thousands of dollars to update, for example, an out-of-spec, point-of-sale system, or even purchase new equipment. Determining who bears the cost of any updates or other franchisor requirements is critical. Most franchisors also require that the seller ensures all outstanding debts to the franchise organization are paid. Additionally, one of the parties involved must agree to pay the franchisor a transfer fee. Who pays (seller or buyer) can be another factor in negotiations.
Franchise buyers also will have to sign a “then-current” franchise agreement. This new agreement should be reviewed carefully by the buyer and his/her attorney as the terms may impact the ultimate purchase price. For example, while the selling franchisee may currently pay a monthly royalty of five percent of gross sales to the franchisor, the terms of the “current” royalty structure may be different for the succeeding (buying) franchisee, who might be required to pay a seven percent monthly royalty under the new contract. As a buyer, knowing that you may have greater ongoing expenses than your predecessor/seller, is a factor to consider when negotiating a purchase price.
Bottom line: Whether you are thinking of buying/selling a franchise or another privately-held business or practice, pay attention to the details. Most issues can be addressed fairly early in the franchise/business selling/buying process, but only if you know those exposures exist. That’s why it makes sense for buyers and sellers to engage experienced franchise counsel to guide them through the franchise acquisition/disposition process. Got questions? Feel free to email them to me, Julie Lusthaus at firstname.lastname@example.org and let’s talk.