Mergers & Acquisitions

Purchasing a franchise unit can be a great way for an entrepreneur to benefit from an established business model and the guidance and brand recognition of a franchisor. However, entrepreneurs may be able to avoid the time and cost of establishing a franchise unit from the ground up by purchasing an existing franchise unit from an existing franchisee. Existing franchisees may have a variety of motivations to sell their units: to pursue other occupations, retire or perhaps because the business is distressed. In any case, you should take certain steps to protect yourself as you consider and execute the purchase of an existing unit:

Business Due Diligence: Begin by evaluating the purchase opportunity as you would any other franchise unit or business purchase. Review the franchisor’s disclosure documents, talk to existing franchisees, and consider whether the franchise represents a business that is right for you. In addition to this basic diligence, you should make efforts to learn about the health of the existing unit. Ask the seller probing questions about the nature of the business and its relationships with employees. Review the unit’s historical financial statements to determine trends in business revenues, key expenses and financial risks. Try to determine what investments may be necessary to maintain or improve operations and attempt to discover whether there may be future market trends that could impact the health of the business. Additionally, try to determine if the seller has operated the unit in accordance with the franchise model. If not, this may present an opportunity for you to improve the business quickly or it may be an indication of other problems with the business itself or the franchise as a whole.

Investigate the Franchisor’s Requirements: Often franchisors will require any purchaser of an existing unit to meet the minimum net worth and liquidity requirements applicable to typical franchisees. Franchisors may also require purchasers to engage in training and be approved by the franchisor before a purchase can occur. Additionally, the franchisor may require certain upgrades or investments at or near the time of purchase. Discuss these details with the franchisor and the seller and review the franchisor’s disclosure documents and the existing franchise agreement to plan appropriately for these issues.

Negotiate the Purchase Agreement: Most franchisors will require payment of a transfer fee to the franchisor in the event of a sale of an existing franchise unit. Be sure that you negotiate how this fee will be shared or how the purchase price will be adjusted to account for this fee. Additionally, the purchase agreement should stipulate how the franchise agreement will be transferred. Often parties will determine that the purchaser will assume the remaining term of the agreement and sign a new agreement with the franchisor at the end of the term. Be sure that your method of transfer conforms to the franchisor’s requirements as stipulated in the franchisor’s disclosure documents for transfers of franchise agreements. You should also make sure that the purchase agreement contains representations and warranties regarding the business and that the seller is held responsible for making all material disclosures about the business to you.

Use good legal counsel. Engage legal counsel that will protect your interests in negotiations with the seller and assist you in identifying issues and risks in relation to your purchase. If you are considering buying a franchise unit, feel free to contact us for assistance.

There are a variety of ways to structure the sale or acquisition of a business or enterprise. The most common methods are stock purchases, asset purchases and mergers. Determining which structure to use is often a matter of negotiation and is impacted by the various considerations of the parties to the transaction.

Stock purchases. In a typical stock purchase transaction, a buyer pays to acquire the stock of the business target. Through such purchase, the buyer assumes the assets and liabilities of the business and can step into the shoes of the former owners with regard to existing agreements as well as title to assets and ownership of liabilities with limited documentation required. In the case of a business with a large number of stockholders, like many publicly traded companies, the buyer will often take precautionary measures to ensure that all stockholders, or at least the vast majority, will agree to sell their stock. Buyers will also seek to negotiate protective provisions in the sale agreement like indemnity provisions and representations and warranties from the owners to protect against unforeseen liabilities or undisclosed issues with the business.

Asset purchases. In an asset purchase scenario, a buyer pays for specific assets and specific liabilities of the target company. In this scenario, the parties must work together to identify the appropriate assets and liabilities for transfer and take all necessary steps, including obtaining third party consents, executing transfers of deeds, bills of sale, assignment and assumption agreements and other documents to transfer title or ownership of the each purchased asset and liability from the seller to the buyer. This can be a time-intensive process, but is often preferable when a buyer is not interested in acquiring the entire business or where the buyer wants to be certain about the assets and liabilities it will acquire. Parties to an asset purchase transaction must also negotiate the allocation of the purchase price to the purchased assets for federal taxation purposes.

Mergers. In a merger transaction, two business entities are combined into a single entity, typically when a subsidiary of the buyer entity purchases the stock of the target business. Like a stock purchase scenario, the buyer entity assumes the assets and liabilities of the target business with limited documentation. Mergers are often preferable to a traditional stock purchase transaction in cases where there are a large number of stockholders, some of whom may not be willing to sell their shares. In that case, a merger can typically occur as long as a majority of the stockholders agree to sell their shares.

A merger or acquisition of a company can take many different forms. Ultimately, the parties to the transaction must consider their goals from a financial and future operating perspective to determine which transaction structure is appropriate. If you need assistance in determining the transaction structure that is appropriate for you, feel free to contact us for assistance.

Selling a business can be a time-consuming, emotional and stressful process. We’ve compiled the following tips to help you prepare:

1) Get organized. Compile your key documents and maintain them in a fashion that is easily accessible. Key documents include: financial statements and tax returns for the previous three years, contracts and agreements with vendors and customers, board resolutions, copies of leases, licenses, and insurance policies, lists of tangible assets and lists of intellectual property. We recommend maintaining copies of these key documents on a secure electronic platform that enables you to grant your advisers and potential buyers access to the key documents as they perform due diligence.

2) Protect Your Information. During the sale process, you will reveal sensitive information about your business to advisers and to potential buyers, some of whom could be your competitors. Make certain that each of your advisers and each potential buyer is bound by a confidentiality agreement and non-disclosure agreement. If you need assistance in preparing a customized confidentiality and/or non-disclosure agreement, contact us. Although a confidentiality agreement will not guarantee that sensitive information about your business is never exploited, it will send a message to your advisers and potential purchasers that you value your business information and that you are serious about protecting it. You can also take precautions to limit disclosure of sensitive information by requiring potential buyers to make good faith deposit and offer before releasing your most sensitive information.

3) Don’t ignore taxes. Tax planning is a crucial part of structuring an effective business sale strategy. Talk with your accountant or tax adviser about the recognition of gains from the sale to determine the optimal timing for sale proceeds. For example, you may determine that it is optimal for your tax planning needs to accept a promissory note instead of cash for a portion of the purchase price to minimize the immediate tax impact of the sale. In the context of an asset sale, you will also need to consider the tax effect of the allocation of the purchase price to the purchased assets.

4) Be flexible. Determining an appropriate purchase price and negotiating payment terms with a potential buyer is an art, not a science. You can often generate more value for yourself over the long-term by being flexible in negotiations than a more rigid approach.  Rely on your legal and financial advisers to assist you in evaluating appropriate sale structures and maximizing realized value for your business.

5) Use good legal counsel. You’ve spent a lot of time developing and growing your business. You should engage legal counsel that will protect your interests and help you realize the full value of your business as a going concern. Feel free to contact us for assistance as you prepare for the sale of your business.