Franchise Resales

Posted 12/05/2016  By: Tracy Williamson Ashtons Legal

When a franchisee operates its business through a limited company, there are two possible ways in which the franchisee business can be sold, either by the company selling its business and assets to the purchaser (an Asset Deal) or by the shareholder(s) selling their shares in the company to the purchaser (a Share Deal).There can be tax advantages gained by both the seller and purchaser through choosing the correct structure for the deal.

In an Asset Deal, it is common practice for the franchisor’s solicitor to provide a draft sale agreement, to which the franchisor would be a party.Both purchaser and seller (or their respective legal advisors) are at liberty to amend the sale agreement, though the franchisor’s solicitor will require sight of the final version, once this has been agreed between the parties, to ensure the franchisor’s interests are protected.

The consent of the franchisor will be required for all franchise re-sales and there are certain fundamental protections which a franchisor should require be in the sale agreement.

A Share Deal proceeds in a similar manner, in that certain protections will be required to be included in the sale agreement in favour of the franchisor.

One of the fundamental differences between a Share Deal and an Asset Deal is that in an Asset Deal it is possible for the purchaser to pick and choose what assets/contracts/equipment etc it does or does not want to buy.Generally, the purchaser will take the “good stuff” and leave the “bad stuff” behind.

When buying the shares in a company, the legal entity which runs the franchisee business does not change and therefore the purchaser is effectively taking over the franchisee company in its entirety, acquiring all of its assets, equipment, staff, contract etc as well as taking on its liabilities and obligations.

Therefore, the due diligence and warranties process is arguably more important in a Share Deal than in an Asset Deal.

There are certain pieces of legislation which apply to Share Deals, which revolve around knowingly or accidentally misleading a purchaser of shares in terms of the information which is provided.

As a result, a franchisor does not get involved in the process of producing the sale agreement for a Share Deal as it can be implied that the franchisor is recommending to the purchaser the warranties they require for their transaction.This can have adverse consequences for a franchisor.

It is therefore common practice for the purchaser’s solicitor to produce a draft sale agreement, so they can include the warranties that the purchaser will require.The franchisor would need to be a party to the sale agreement and certain clauses will need to be inserted in the sale agreement to ensure the interests of the franchisor are protected..

As with an Asset Deal, the existing Franchise Agreement is terminated and a fresh Franchise Agreement would be entered into.

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