When selling your franchise, you can either do a share sale or an asset sale. But knowing which one best fits your needs can be tricky
A goal for many franchisees is to build a successful business that they will ultimately be able to sell on, realising a capital return on their investment. Where a franchisee operates through a limited company, there are two ways to structure the sale: by either selling the business’s assets or its shares. However, the differences between asset sales and share sales can be huge. Fortunately, we’re here to help you choose the best deal for you.
Let’s start with asset sales as they’re usually the most straight forward. They enable the buyer to cherry pick the assets and liabilities they wish to buy. Typically, this will include all of the physical assets like equipment, stock, employees, premises and customer contracts. But importantly, they include none of the liabilities. Existing liabilities will usually be left behind for the seller to settle. Equally, any cash in the business is usually excluded from the sale.
The employees will have an automatic right to transfer to the buyer under the Transfer of Undertakings (Protection of Employees) Regulations 2006. The regulations stipulate that the buyer steps into the seller’s shoes and must continue to employ the staff on broadly the same terms as those on which they are employed prior to the sale.
All customer contracts will need to be transferred to the buyer. This can usually be done without the consent of the customer, although customers will need to be informed of the new management and changes in payment details.
If the business has leasehold premises then existing leases will usually be transferred to the buyer, which will involve obtaining consent from the landlord. While landlords aren’t obliged to agree to a transfer, they’ll usually oblige if they’re confident that the buyer’s financial standing will enable them to keep paying the rent. However, if there is a relatively short term left to run on the lease, it may be more convenient for the seller to surrender their lease and for the buyer to enter into a new contract directly with the landlord.
Once the sale completes, the proceeds of the sale will be paid to the franchise company. The company will then pay off any liabilities before distributing the net proceeds to its shareholders and if necessary, winding up the company.
In a share sale, all of the existing assets and liabilities remain in the franchise company, but the owners of the company – the shareholders – will change. The buyer will inherit the company, warts and all, with any and all assets and liabilities that happen to be in the company on the day of completion.
In a share sale, there is no need to actively transfer any assets or liabilities as they all remain within the company. Still bank mandates will need to be amended to give the buyer control of the bank accounts and any personal guarantees given by the sellers will need to be released.
The sale proceeds will be paid direct to the sellers and the buyer will pay stamp duty at a rate of 0.5% of the sale price.
Horses for courses
So which is better, asset or share sale? There is no right or wrong answer because it will depend on the specifics of the individual deal.
Asset sales tend to be less risky from a buyer’s perspective as the sale agreement will expressly set out the items being transferred and the buyer has the opportunity to exclude anything he doesn’t want to take over such as historic liabilities. This in turn means the legal process is generally quicker and easier with an asset sale, meaning lower professional fees. Asset sales are often used with retail businesses where the business is relatively simple and the sale price is often fairly small so that the higher costs associated with a share sale are unjustified.
If the business involves a large number of customers making regular monthly payments by direct debit, a share sale may be more convenient as the buyer can take over the existing bank account, avoiding the need to transfer all of the customer payments to new accounts and update direct debit details.
Similarly, if the company has specific authorisations and consent documentation that the buyer wants to retain – for example, a care business may wish to retain its existing registration with the Care Quality Commission – then it may make sense to sell the shares of the company so that licences and registrations remain intact.
The main disadvantage with a share sale is that it carries more risk for buyers because they’ll inherit any skeletons that might hide in the closet. This means the buyer will need to carry out a more thorough investigation into the company before completing the sale and the sale agreement will contain more complicated buyer protection provisions.
Although the tax position should never be the sole driver in the decision, it’s worth mentioning as the tax treatment of the proceeds of sale under the two structures will differ.
In an asset sale, the proceeds of sale will be paid to the company, which will pay corporation tax on its net profit for the year. The net proceeds will then be distributed to the shareholders who will pay income tax at their individual tax rates.
In a share sale, the proceeds are paid direct to the shareholders so there is no tax for the company to pay. The shareholders will pay capital gains tax on the proceeds, but reliefs such as Entrepreneurs’ Relief may be available to reduce the tax payable.
Overall, a share sale is generally more tax efficient for a seller. However, if the sale proceeds are small, the increased professional costs associated with a share sale may offset any tax gains.
Both asset and share sales have a mix of advantages and disadvantages. Which is most appropriate will depend on your specific circumstances, so I advise both buyers and sellers to discuss the options with their solicitor before choosing a way forwards.