Denver Colorado Franchise Attorney Martin A. Mansfield, Jr.

Purchase and Sale of an Existing Franchised Business

The usual method for the purchase and sale of an ongoing franchise is an asset purchase and sale:

Purchase and Sale of Business Assets:

Most purchase and sale agreements for franchised businesses are known as Asset Purchase agreements.  These allow for fine-tuned control of precisely what aspects of the business are transferred.  The assets identified in the agreement are those sold to the Purchaser; everything else is retained by the Seller.  This type of agreement can be used regardless of the business format of either the Seller or Purchaser.  The Seller's debts, stock equity if applicable, other contractual agreements, and even ability to continue as a non-competing business, are unaffected and not generally transferred to the Purchaser.  This form of agreement makes a potentially highly complicated transaction relatively straightforward.  Using this form is also likely to save on attorney fees, because the contract can protect the parties from a more defined set of risks compared to those in other transaction forms.

The Asset Purchase Agreement and Related Items:

For asset purchase transactions, the key legal document is the Asset Purchase Agreement.  This document and its attendant exhibits or schedules sets forth the assets to be sold and the agreed-upon price.  If I am your attorney, I will participate in the preparation and advise you on terms that should be negotiated.  If the other party is represented by an attorney, then I will probably have discussions on your behalf with that attorney.  If the other party does not have an attorney then you will have to do all the discussions with that other party, since legal ethics prohibit me from having such discussions.  Regardless of the attorneys involved, the parties are free to negotiate and discuss with each other, and this usually happens.  Indeed the parties usually have negotiated much of the transaction before attorneys are brought in.  These transactions usually go more smoothly if both parties are represented by attorneys, and in this case, by franchise attorneys.  

The list of assets sold is critical and it is up to the Purchaser and Seller to itemize with reasonable detail the physical assets that go with the sale.  The age and condition of the assets is also crucial in determining the final price to be paid for the purchase.  Inventory will also have to be factored in, and the final price is usually adjusted to reflect the actual inventory at closing.  Other assets, such as the franchise agreement and relationship itself, that are intangible, will usually be defined by the attorney in consultation with the client.  

The Asset Purchase Agreement establishes a procedure and timetable leading to the closing.  Much of the agreement involves an ongoing process of resolving contingencies, exchanging information, and so forth.  

Both parties make appropriate representations and warranties to the other.

Often but not always the parties exchange financial information about each other.  Financials concerning the performance of the franchise itself is always involved and the Seller has to represent and warrant that the financials are true and correct.  The franchisor can be of some assistance here in verifying the figures and showing the royalties paid since those royalties can often be calculated back to gross revenues in most cases.  

This agreement is usually done before all details are finalized, so it usually contains a list of contingencies that have to be satisfied for each party in order to close.  In all cases, franchisor approval of the transaction is a contingency.  So at some point the agreement is signed by the parties, but is not final until closing actually occurs.  

Often this agreement will contain a covenant not to compete that restricts the Seller's ability to engage in a similar business nearby.

Terms of payment are a key issue.  Is this an all-cash sale or will there be financing?

The actual agreement in each case will vary in complexity depending on the size and complexity of the actual transaction.  I can help you with any such agreement from small to large, from relatively simple to complex. 

A less used option is a stock purchase and sale:

Purchase and Sale of Stock (Corporate Transactions):

Sometimes, the Seller and Purchaser want the entire corporate business to be transferred as a going business and use the Stock Purchase agreement to accomplish this.  On its face, the sale of the stock seems to be a simple solution, but because all the debts, liabilities, contractual and employment obligations, etc. of the business are transferred right along with it, the Purchaser needs many risk protections built into the agreement that are not required in an asset purchase agreement, and Purchaser's attorney must do considerable due diligence to be reasonably sure that unwanted problems that could become the Purchaser's responsibility are either not transferred or are indemnified against by the Seller.  However, there are situations where a stock purchase agreement is the preferred solution. 

The Stock Purchase Agreement:

In one sense the stock purchase agreement is simpler than the asset purchase.  Rather than purchasing a long list of assets, the stock ownership of the corporate business is being purchased.  But this simplicity is quickly overwhelmed by the many other considerations that are involved in buying a company outright, given that all the employees, benefit plans, obligations, debts, contracts and liabilities (even contingent liabilities that may crop up in the future) are part of what is being purchased.  And a long list of assets is still part of this mix, since the Purchaser will want to know all aspects of what is being purchased.  Although there are reasons for stock purchase transactions, such as in very large corporate transactions where the whole business has to be purchased to accomplish the practical goals of the purchaser, in almost all cases of purchasing a franchisee-owned franchised business or even a grouping of such businesses, the asset purchase agreement is superior.  

If you think your proposed transaction might work better as a stock purchase, please contact me for a no charge no obligation preliminary conference to discuss and we can go over the relevant factors then. 

Franchisor Approval of the Transaction and the Purchaser:

Franchisor approval is part of the process in every purchase and sale of an existing franchised business, be it an asset or stock purchase.  This is not just approval of the Purchaser as a prospective franchisee, but also approval of the sale itself.  

And in many cases the franchisor has a "right of first refusal" allowing it to evaluate the proposed terms of sale and determine if it wants to step in as the buyer under the same terms. Often the franchisor has a length of time such as 30 days to do this evaluation and this can slow down the process.

Franchisor approval is essential in order for this process to reach closing, and that approval is a multi-step process.  

The Purchaser will want to be absolutely certain of being approved by the franchisor prior to closing and will want to make sure that all aspects of approval are satisfied as a condition of closing.  

The Seller is also concerned about franchisor approval.  The Seller may have a tight time-line in mind for completing the sale and will want certainty of franchisor approval.  The Seller will want the Purchaser to be required to fully cooperate with the franchisor in order to expedite the process.

The franchisor may have concerns over certain terms of the asset or stock purchase agreement and may require that certain language be put in the agreement as a condition of approval.

Fees of some amount almost always have to be paid the franchisor as part of the transfer process.

Purchaser Evaluation of the Franchisor and Franchise Agreement:

The Purchaser will also want to evaluate the franchisor in a manner similar to that of buying a new franchise, at least to make sure there is a good fit and that the Purchaser has faith in the franchisor.  Since this is a purchase of a going business, there is generally less start up risk for the Purchaser compared to buying a new franchise directly from the franchisor, but there are some risk elements.  For example: Has the franchisor changed ownership?  Is the franchisor financially sound?  Are current franchisees mostly satisfied with the franchisor?  Are there any bankruptcies or lawsuits in the background? Therefore, the Purchaser should get a current FDD from the franchisor and have it reviewed by an experienced franchise attorney.

The Purchaser will also want the reviewing attorney to evaluate the franchise agreement situation, since the Purchaser will either be assigned the existing franchise agreement or (more likely) sign a new franchise agreement in the form currently being used by the franchisor.  The new form may or may not be the same as the existing franchise agreement.  If the existing franchise agreement is being assigned, then there will be little or no negotiation possible with the franchisor because the franchisor will want the agreement to remain the same with only a few changes, and the attorney franchise review will be in that context.  But if a new and different franchise agreement is to be signed, then that agreement should be evaluated by the attorney both in terms of what the Purchaser might need and also concessions that might have been granted the existing franchisee and should carry-over to the new agreement.  

The Purchaser will want to perform due diligence on why the Seller is selling.  Is this an underperforming franchise within the system?  Is the Seller in full compliance with the franchise agreement? Are potential lease problems or rent increases on the horizon?  Or is this just a matter of relocating, retiring or some other neutral reason.  Only persons with specialized experience should consider buying a problem franchise.  Often the critical problems are beyond the help of a normal business person and the Purchaser could be buying more of a problem than an asset.

If it looks like the Purchaser is doing most of the due diligence, that is true.  The Purchaser wants to make sure the purchase is a good one.  The Seller typically just wants to be sure the payment funds are good. 

The Seller does want to be sure of the Purchaser bona-fides and wants to make sure the needed funds for the purchase are there.  If Seller financing is being requested by the Purchaser, then further evaluation of the Purchaser is needed.   

My Services and Fees for these Matters:

I recommend you retain me at my $325 hourly rate, as this will probably result in the lowest fee. 

Typically the fee for an asset purchase transaction will run $2600-$3900.  Fees are usually moderately higher for representing the purchaser side than they are for representing the seller side.

Stock purchase transactions are more time consuming, and typically the fee will be $3900 or more, based on my hourly rate.

Services include, but go beyond, legal drafting of the agreement and exhibits.  A large part of the representation involves consultation on the ongoing practical and legal issues inherent in the process.  This is one reason why a cookie cutter approach is unsuitable.  The mere use of an agreement form by the parties will result in a less than optimal result.  Therefore, even though an attorney does add some cost to the transaction, the cost is well worth it over a self-help approach or the use of quasi-legal web based services, however well promoted those services may be.

Please remember that an attorney can only represent one side to the transaction, the purchaser or seller.

For additional information, you can Contact me by email from this Web site or telephone me at the number at the bottom of this page.