A franchise resale could provide a springboard for your own success

Posted: 25 Oct 2019
Estimated Read Time: in 17 minutes

Investing in a franchise resale could provide a springboard for your own success

A franchise resale could provide a springboard for your own success

As franchise networks become more mature, a prospective franchisee is increasingly likely to be offered the opportunity to buy an existing franchise business through a resale, rather than starting up a business in a new territory.

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A resale transaction offers the advantage of buying a business already established in terms of customer base and local reputation, but as with all business decisions it’s important to weigh up the pros and cons a resale opportunity presents before committing to the investment.

Franchise businesses can be purchased either as an asset or a share purchase. Either way, before you can proceed you will need to be approved by the franchisor as suitable to be a franchise owner.

The franchisor may require the selling franchisee and you as the purchaser to use the franchisor’s standard form of sale agreement as part of the approval process. The franchisor is often a party to the sale agreement to ensure the conditions in the franchise agreement governing a sale by a franchise owner are satisfied.

Asset purchase

An asset purchase means that you - or a limited company you set up for the purpose - will acquire the assets - machinery, equipment, stock, etc - of the existing franchise business. You also become the employer of the employees by accepting a transfer of their existing terms and conditions of employment and acquire the selling franchisee’s interest in any leasehold premises required for the business.

The due diligence - the enquiries you and your advisers carry out before the purchase - focuses on what assets are being acquired, because the sale contract enables the seller and buyer to exclude certain liabilities from the sale.

For example, it would be standard practice for the seller to retain responsibility for the debts and tax liabilities of the business incurred up to the date of sale and for you to be responsible only for the debts and liabilities incurred under your period of ownership.

Share purchase

This is in contrast to a share purchase, where the buyer acquires the shares in the company operating the franchise business from the existing shareholders. The effect of the share transfer is that the franchise company continues to operate as before, with no break in continuity of trade.

The employees remain employees of the franchisee company, the lease of premises remains in the name of the franchisee company and all debts and liabilities remain with the franchisee company. As the prospective new shareholder, you will need to carry out much more detailed due diligence to make sure you have assessed the liabilities of the franchisee company being acquired.

It’s standard practice for the share sale agreement to contain some provisions to protect the new shareholder in the form of warranties, or contractual promises, given by the selling shareholders. If a warranty is breached, it can give rise to a claim for compensation.

It is usual for the selling shareholder to enter into a covenant to be responsible for any tax liabilities of the company operating the franchise that are outstanding at the date of completion of the sale.

Increasingly, a share sale may contain a requirement that a balance sheet is drawn up to confirm the net asset position of the company at the date of completion of the share purchase.

The buyer is likely to have agreed to have offered to buy the company on the condition that its finances reflect an agreed position, often debt-free and cash-free. This means that the share sale agreement will contain a mechanism for the share price to be adjusted up or down, depending on the results of the completion balance sheet. If liabilities exceed assets, the price is reduced and if assets exceed liabilities the price is increased, usually on a pound for pound basis.

Benefits of purchase

Apart from the structural differences between a share sale and an asset sale, a resale gives the prospective franchisee an opportunity to buy a business with a proven track record. It also allows you to invest in a business in a specific geographic location that the franchisor may not otherwise be able to offer you. Inevitably, as franchise networks grow the number of available territories reduces, which means a resale may be the only practical way to buy a business in a particular area.

Cost of purchase

The initial price of a resale is likely to be higher than a franchise in a new territory, but offers the benefit of acquiring a business that produces sales turnover from the day you complete the purchase, rather than having to fund the new business while it commences trading, as is the case with a start up.

If you decide to buy a resale, ensure you know about all the costs involved. You will need to check whether key equipment, signage or fittings will need to be updated to bring the business in line with the franchisor’s current requirements.

A resale will also involve payment to the franchisor of either an initial franchise fee or a training fee, which is often a percentage of the current initial franchise package fee. Although the business will not require all the items associated with a new start up, you will require training in the franchisor’s business system.

Securing funding

Acquiring funding to finance your purchase can be easier with a resale, as the trading history of an existing business will give a lender confidence that the business can provide a revenue stream from the outset from which to repay a loan.

It’s important to analyse the financial performance of the business, but past performance is not a guarantee of future profits. Put simply, with a resale some of the pain and associated investment of getting the business started has been incurred by the seller. It provides the prospective franchise owner with tangible evidence about how the business has operated historically.

Provided you carry out proper investigations about the trading history of the franchise business being offered for sale, a resale can provide a springboard for your own success as a franchise owner. It’s advisable to engage accountants and solicitors to help you in the process who are experienced in advising on franchise resale transactions and able to guide you through the process with confidence.

4 advantages of buying a franchise resale

1. You’re buying a business with a proven track record.

2. Some of the associated investment of getting the business started has been incurred by the seller.

3. The business produces sales turnover from the day you complete the purchase.

4 Acquiring funding to finance your purchase can be easier with a resale.

The author

Jane Masih is head of franchising at Owen White Solicitors

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