Types of existing franchise sales
If you are looking to purchase a franchise that is part of a well established system, then you will probably be looking at an existing franchise.
There are two types of sale that the existing franchisee can employ; share sale or asset sale. These are both very different and it is important that you and the seller understand the implications of each.
Purchase shares
In a share sale, you purchase shares in the trading company. The ownership of the company changes, but the trading business stays exactly as it was before the sale.
In an asset sale, the trading business is transferred from the seller to you. After completion of the sale, the seller will be left with a shell company (subject to any assets or liabilities that the buyer chooses not to take), the other business and assets having been transferred to you. The business is operated by you through a different legal entity.
The asset sale is probably the easiest for all parties concerned as it gives the flexibility to pick and choose which assets and liabilities will transfer; however a share sale is typically more tax efficient for the seller. To put this in perspective, with the right structure a share sale may incur a Capital Gains Tax liability of 18%, reduced to 10% as Entrepreneurs Relief is likely to be available. An asset sale could incur a tax liability of over 50% as Corporation Tax is paid by the company on the sale price and then Capital Gains Tax or Income Tax is paid by the individual extracting the profit from the company.
Share sales pose a greater risk to the buyer as they will inherit all liabilities, known or unknown. This can include tax due, property liabilities and possible litigation by customers or staff. Therefore, buyers will need to gain a thorough understanding of exactly what they are acquiring before committing themselves.
Financial agreements in place
Another area that must be considered is if there are any existing finance agreements in place. With an asset sale there will be a change in legal entity and the lenders consent would be required. This is not the case with a share sale but ‘change of control’ provisions are becoming increasingly common, which allows the agreement to be terminated.
If the franchise operates from premises then there are further issues to consider. If an existing lease is to be assigned to the buyer, the landlord’s consent will be required. This consent is also required for an asset sale and Stamp Duty Land Tax will be payable, another cost which must be factored in.
If the franchisee employs staff, then the type of sale chosen will impact them in different ways. If you want to reduce the number of staff, in an asset sale Transfer of Undertakings Protection of Employment (TUPE) rules will apply but this is not the case in a share sale as the employment contract continues as before.
In summary, there are pro’s and con’s to both the asset and share sale options, with sellers usually preferring a share sale whilst purchasers tend to prefer the simpler and less risky asset purchase.
It is essential that you take legal and accounting advice at the outset and consult with the franchisor throughout the process.
