Businesses which are operated within the ambit of a franchise arrangement can be bought and sold, in the same way that any other business can change hands. What are the headline issues and structures to be aware of when considering this process?
Transaction structures – share sales
Commonly, businesses change hands by means of the shares owned by the shareholders of the company being transferred into the hands of new shareholders. This is undertaken under the terms of a “share purchase agreement” whereby the buyer and seller will agree the terms of the transaction, including as to price, payment and certain undertakings given by the seller to the buyer in relation to the business being transferred.
A transaction like this is undertaken over a period of weeks, and usually also involves the process of what is known as “due diligence” whereby a buyer will undertake an investigation into the target business to ascertain whether there are any unforeseen liabilities or issues which need to be accounted for in the transaction documentation.
A share sale within the context of a franchise arrangement
Clearly, a business operated as a franchise is the subject of a separate agreement with a franchisor which governs various aspects of how the business in question is to be owned and operated. How does this affect the share transfer process described above?
Broadly, a share transfer is undertaken in exactly the same way, with the additional element of a requirement to involve a franchisor in the process – because the incoming owner of the business will (obviously) need to be party to a new franchise agreement with the franchisor, and the franchisor will only be prepared to grant this if he is satisfied with the good standing of the incoming purchaser.
An additional facet of transactions of this sort is that the parties to a share transfer agreement – where the business is run under a franchise – include not only the buying and the selling shareholders, but also the franchisor.This is partly because transfers of payments and various other steps are referred to in the share transfer agreement, and the franchisor will wish to be party to these requirements.
As a result, the negotiation of a share transfer of a franchise business involves at least three parties (the buyer, the seller and the franchisor), as well as any funder providing funding for the purposes of the proposed purchase.
Process considerations
It might be assumed that the introduction of a third party (the franchisor) to the sale process can extend the time and process associated with undertaking a transaction. In practice, this is not usually the case – sale and purchase agreements in this context tend to be at the straightforward end of the spectrum, and in a form which has been standardised by the franchisor.Some negotiation is then undertaken between buyer and seller, but this is limited in scope. As a result, the process is (relatively) straightforward when compared with traditional M&A processes which can run for several months.
Other considerations
Preparing a business for sale is itself the subject of a separate discussion outside the ambit of this note – but in the same way that any business needs to be set up for sale in order to be attractive to a potential buyer, this applies to franchise businesses. A range of other considerations arise in relation to how transactions of this sort should best be managed, to avoid them taking an unnecessary amount of time and management input.
Our corporate team has extensive experience of advising on transactions of this nature, and we would be happy to speak with you to discuss any of the above issues in more detail.
