Franchise re-sales – asset or share?
Cathryn Hayes - HSBC Head of Franchising
It is inevitable that at some point franchisors will be faced with franchisees who wish to sell their business – particularly mature franchise systems.
There are two types of sale that the franchisee can employ: share sale or asset sale. These are very different, and it is important that both the buyer and seller understand the implications of each.
In a share sale, the buyer purchases the 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 the buyer. 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 assets having been transferred to the buyer. The business is operated by the buyer 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.
However, share sales pose a greater risk to the buyer as they will inherit all liabilities, known or unknown. This can include unpaid tax, 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, and we would recommend independent legal advice is sought.
If there are any existing finance agreements in place, with an asset sale there will be a change in legal entity and the lender’s 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 finance agreement to be terminated.
If the franchise operates from premises then there are further issues to consider. If an existing lease is to be transferred 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, the type of sale will affect them in different ways. If the buyer wishes to reduce the number of staff, Transfer of Undertakings Protection of Employment (TUPE) rules will apply in an asset sale. This is not the case in a share sale as the employment contract continues as before.
Kate Legg, Commercial Associate at Higgs & Sons Solicitors specialises in franchise law and has experience of franchise re-sales. She commented, “Some franchise networks do not have any formal re-sale procedures in place and those that do usually have a process geared towards asset sales, but not share sales. This is an area that needs to be considered carefully. Different processes will work better for different networks – it is not the case of ‘one size fits all’. Having established what process fits with the network, the franchise agreement should then reflect that”.
In summary, there are pros and cons to both the asset and share sale options. Sellers would usually choose a share sale, while purchasers tend to prefer the simpler and less risky asset purchase. If any of your franchisees are thinking of buying or selling a franchise, it is essential that they take legal and accounting advice at the outset and consult with you throughout the process.
Posting from the monthly HSBC Connections newsletter. For more information or to get on the mailing list for the newsletter please email franchiseunit@hsbc.com
10 Things To Consider When Buying A Franchise
Stephen Thorns - Managing Director, Qutis Clinics
Are there really 10 things to consider? Or are they really only two or three things that are that important? I will let you make up your own mind.
What to consider or prioritise depends, on what kind of person you are. Are you high risk or low risk for example?
As a new franchisor with recent experience of recruitment, I would consider the following when buying;
- How much have I got to invest?
This is in two parts; how much of my own funds do I have and how much am I prepared to borrow? It is vital that you match the amount of funding you have with the costs of the franchises you’re considering. Every piece of research suggests that one of the main reasons for business failure is insufficient capital. My other question would be; am I prepared or able to remortgage my house and release say a further £30-£50,000? - Where are my natural skills and possibly more importantly what would I be keen to learn?
- Which franchise businesses operate in a growing market?
A rising tide lifts all boats and it is easier to grow business when the market is growing. Obviously, one needs to take account of competition but this can be a double-edged sword. The absence of competition, may suggest there is not the market that we thought. On the other hand, lots of competition may mean the market is buoyant and we could take customers from our competitors. In this latter case it is important to understand how price sensitive the market and business may be. The best way to win a price war is not to enter. - Where do I get the best return on my financial investment and time?
- What kind of customers do I want to serve?
- How well does the franchise fit with the kind of lifestyle I want?
- What is my exit plan?
- How much could I sell my business for and to whom?
- and 10. What two final points have I not listed that are important to you?
Stephen Thorns is the founder and managing director of Qutis Clinics, a new franchise model based on our success owning and operating skin care clinics in Oxfordshire since 1998.
10 ways to generate publicity to improve your Franchise recruitment
Sally Anne Butters – Head of Media, Coconut Creatives LLP
Media coverage can be a blessing for franchisors if it is managed well; as your profile goes up, so will your recruitment figures. Whilst an integrated marketing campaign will always yield the best results, not all of its activities have to incur a direct cost. Here are 10 things to consider within your franchise marketing plan that do not have to break the bank!
1. Focus your PR efforts.
Choose carefully exactly what message you want to convey, your target audience and your target media. Whether it’s the launch of a new franchise opportunity, a significant anniversary or a competition win, make sure it is relevant to the readership of your targeted media — be it print, broadcast or online.
2. Use social media for free PR.
You can set up a Facebook page or a Twitter account at no cost. Social media is an excellent way to build relationships with your prospects and create word–of–mouth publicity. This can get addictive so make sure that you only devote an appropriate amount of time to tweeting as if your target audience doesn’t use social media that much then you could spend your time more effectively elsewhere!
3. Viral marketing.
Whether it’s a YouTube video with thousands of views, or a photo that is tweeted and retweeted, if your promotional material goes ‘viral’ it can give your public profile a huge boost. There is no magic formula to viral marketing — but something quirky, interesting and funny is more likely to capture people’s imaginations.
4. Write a great press release.
Press releases have more uses than just being sent to journalists, they can also go on your website, be linked to your social media profiles and added to any recruitment website listings you may have. Ensure you have a catchy headline and a strong, summarising opening paragraph and an image to capture the imagination before getting into the details.
5. Get back to basics.
Don’t waste your time sending out endless empty press releases. Journalists want to write about something that is newsworthy, particularly if it will appeal to their readership. If it’s linked with famous people or events, controversial, amusing, or relevant to a current national news item then you are much more likely to get the coverage you want.
6. Advertising promotions.
Many advertisers also offer editorial space with the space you have paid for. If you take up this free editorial space, make sure you fill it with something appealing to the readers of that publication and give them something to act on – visiting you at an exhibition or joining one of your discovery days.
7. Go for gold.
Winning an award is a fantastic way to get publicity — not only does it recognise your talent and increase your prestige, award ceremonies are a good place to network and are usually covered by the press. Some awards are free to enter so look out for ones that are well respected in your industry as well as the franchise sector.
8. Get philanthropic.
Giving your time for free can be a scary thought when you are a busy franchisor but it can pay dividends! Getting your team involved in a charity event or offering to speak at a networking event can all have the secondary benefit of raising the profile of your franchise opportunity.
9. Deal with bad publicity promptly.
Swift, effective action can turn a negative comment into piece of good publicity. If a customer complains, contact them directly with a full apology and suggested solution. If you see negative and anonymous comments online, respond honestly in the same forum, explaining the situation from your perspective. Do not ignore negative feedback — it may be the first thing a prospective customer sees if they decide to search for you online.
10. Keep it in perspective.
Publicity is a great way to increase footfall but don’t neglect other aspects of your business in a bid to boost your profile. Don’t forget that a multi-channel marketing approach is always the most successful route to recruit franchisees.
Ask an expert!
If you don’t have time to manage your own PR, then it is worth outsourcing it. While some companies will work for a reasonable retainer, always ensure you know what you are paying for. If you are not sure if you’ve been given a good deal and want some advice, email me sally@coconutcreatives.co.uk and I’ll give you my opinion. We offer a limited number of PR Pay by Results services to franchisors each month, so if you want to do the writing part yourself but want to leave the dealing with journalists, editors and freelancers to someone else, get in touch to subscribe.
Sally Anne Butters MCIPR, is Head of Media at Coconut Creatives.
