Due Diligence and Cleaning House Before The Sale
The multi-unit franchisee market is hot for newcomers with money to invest. What this means is that it is also an incredibly hot market for current franchise owners that are wanting to bring in additional investors, sell off a few franchised units or a territory to support a new business strategy, or transfer ownership or assets of the franchised business completely to explore the next business venture or personal adventure.
In the last installment, "Negotiating Franchise Agreements and Letters of Intent," we collaborated with Lisa Payrow, a franchise attorney with Arnall Golden Gregory LLP based in Atlanta, GA, on legal considerations in the franchise agreement and buying processes. Our discussion is now shifting to considerations for selling a franchised business, and Lisa again provides legal insight on areas franchise owners should consider when looking to sell a franchised business.
A sale of a franchised business - whether by way of a transfer of ownership or a sale of assets or rights - will trigger certain provisions under your franchise agreement. Most importantly, the buyer will need to be approved by the franchisor; and the franchisor may have a right of first refusal to buy back the business instead. Regarding your franchise agreement, a few key provisions that should be negotiated or at least closely reviewed at the outset when contemplating eventual transfers in advance include:
- Transfer fees and other conditions to transfer
- Definitions of transfer and assignment for purposes of triggering (or not) transfer fees and franchisor notice and consent requirements (for example, provide that transfers to other owners or transfers of minority interests are not subject to fees, notice, or consent)
- Franchisor's right of first refusal
- Scope of restrictive covenants (such as a non-compete) that will apply post-termination upon a transfer event
In addition, as a franchisee, you must negotiate the sale of ownership or assets in connection with a refranchise (sale to another franchisee) or buyback (sale to the franchisor). The transaction is a sale of a business just like the sale of any other sophisticated business and should not be accomplished with a form document, handshake deal, or other agreement that does not protect you and your business.
As a franchise owner selling your business, negotiate the letter of intent instead of just signing what appears to be a good offer, and get your advisors involved early on in the process. As Lisa shared in the previous article, there are several "big ticket" items that should be included in a letter of intent and, if they are left out, you may have a hard time coming to terms in the definitive agreement stage or may have to "re-trade" with the buyer if you didn't ask for some of these terms from the beginning.
As a franchise owner selling your business, gear up for the process in plenty of time and "clean house". Complete due diligence on your own business and have everything in order prior to the buyer starting their due diligence process. You won't want there to be any meaningful surprises to the buyer (and you). This would include reviewing your contracts to make sure they are signed, dated, and on hand and determining what third party consents will be required and on what timeline in the event of a sale of the business (for example, franchisor consents and rights of first refusal and landlord consents for leases to be assigned). Also, consider conducting lien searches to determine what third party liens may be on your business' assets. It sounds simple but, as a seller, make sure you actually own what you are selling (for example, there could be title defects or liens on assets that you may not be aware of, or another entity in your organizational structure may actually own the assets).
The buy/sell market is not new, but for franchise owners and multi-unit franchisees that have been focused on growing their businesses, it may be unknown territory. With so much opportunity for growth, either organically or through buying into new segments, or by selling some of your portfolio to move in a different direction, it is important to understand where and how you can maximize your investment and eventual sale proceeds.
Additionally, a common goal for most entrepreneurial businesses, including multi-unit franchisees, is to build value in the business. In order to build value, it is important to have a clear understanding of your purpose and path to growth and the essential resources needed to support your growth - including facilities, capital, people...and a strong franchise brand that supports its franchisees and has potential for expansion. Otherwise, your growth process may result in more work but the same (or lesser) amount of financial gain.
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