Franchise owners who 'want out' need to put as much thought into selling their business as they would to selling their house. If you're in retail and there are no personal reasons which dictate a date, you will have the choice of selling before or after the usually buoyant Christmas period. Selling beforehand might help you get a better price because the buyer may welcome the chance of benefiting from the festive season's high sales figures and cash flow. On the other hand, selling after the Christmas period may make your annual figures look better and attract a higher price.
Having decided when to sell, your next challenge is to determine if the existing legal structure of your business will work in your favour or to your detriment. More and more businesses are being set up as trading companies by people who don't realise that when they sell they can face horrific capital gains tax (CGT) liabilities. When such a company is not the trustee of a trust, the sale of its assets and goodwill can incur CGT liabilities that frequently run into hundreds of thousands or even millions of dollars. Although companies enjoy some CGT concessions, when the profits are distributed to shareholders via a dividend, the proportion of CGT exemption that applied to the company makes the dividend unfranked and therefore fully taxable in the hands of the shareholders. In short, the shareholders lose most of the benefits that would apply if they ran the business through a trading trust.
Assuming you have a structure that won't work against you, you need to identify all the relevant assets and liabilities. To do this, you'll need proper sets of accounts and proper records of the business. A prudent buyer will require its lawyers to determine that whoever or whatever entity owns the business also owns any trade mark or business name associated with it. They'll also want to know if any of the assets are subject to equipment finance leases and if there are debenture charges or securities over the business. The aim of this is to ensure that the buyer will get exactly what the vendor has represented to him/her. To get a business into a position to sell, the vendor also needs to know that all the relevant material contracts - including leases - can be transferred to the buyer, that the vendor has correctly paid its staff or made adequate provision for their entitlements, and that key personnel who will be essential to the new owner have been locked in.
If you use consultants, accountants or brokers to prepare your records prior to sale, make sure the information they compile is accurate and provides a true and fair position of the business. You may also seek advice from a
franchise lawyer. The information must not exclude information that a court may consider to be 'material information' for a prospective buyer. If you know, for example, that the shopping centre you are in is going to be redeveloped, you need to disclose that information.
You'll also need to ensure that any confidential information about your business remains confidential. This involves getting the prospective buyer to sign a confidentiality agreement which covers the information you want to disclose. You then need to decide how much information you are prepared to disclose, when you are happy to disclose it and when you want the buyer to commit to the purchase. Some vendors ask for what is known as a heads of agreement. Care needs to be taken with such documents because if they are not worded clearly a court may find that they constitute a binding agreement between the parties.
Remember the house sale analogy. Tidy things up, make the business appealing as possible and you stand a better chance of getting the price you want.
This article appears courtesy of
Mason Sier Turnbull.
3-Sep-2007