PURCHASE AND SALE OF A SMALL BUSINESS
UNDERSTANDING THE BUYER’S POINT OF VIEW – PART II
WHEN PURCHASING A FRANCHISE, a buyer has all the concerns pertaining to a non-franchised business, plus an additional set of concerns and obligations. The terms of the seller’s agreement with the franchisor will require the franchisor’s consent to the sale. In evaluating the transaction, the franchisor will consider the terms of the sale, the qualifications of the buyer, and the interplay between the (assumed or new) franchise agreement and any assumed or new premises lease. The franchisor will also require payment of a transfer fee and whatever else it generally requires from new franchisees. Many franchisors require that operators be trained and credentialed in operating the particular franchise. If the buyer is not already qualified as an operator, he may be required to successfully complete a training program which may last several days or weeks, before the franchisor will approve the sale. Additionally, the franchisor will require that the buyer meet its standards for financial soundness and good character.
When a franchise involves a business requiring extensive equipment, such as a restaurant, the franchisor often requires that all the standard and required equipment be included in the sale so that the new franchisee starts with a complete package. In the case of a seller who has been operating the business for a long time, there may be substantial gaps in the equipment, either because the seller has failed to replace lost or broken items or has replaced them with serviceable but non-standard items. Depending on how many and what kinds items are involved, replacement can constitute a substantial expense whose allocation the parties should keep in mind when negotiating the purchase and sale agreement.
Buyers should carefully consider the positive and negative aspects of purchasing a franchise as opposed to an independent business. The primary advantages of a franchise are obvious – name recognition, a following of customers who patronize that franchise, and tested Standard Operating Procedures. In attracting customers, the individual franchisee may benefit from licensed use of recognizable trademarks and trade dress, national or regional advertising, standardization and the proven track record of other franchisees. On the other hand, the franchisor’s royalties increase the franchisee’s monthly nut substantially. Contributions to advertising and marketing funds are often required, and the franchisor usually requires that equipment and procedures be kept up to date and in accordance with its standards.
In the case of a franchise dealing with the public, such as a restaurant, the franchisor usually requires renovation and redecoration of the premises on a set schedule, regardless of the profitability of the particular business, and may adopt new standards with startling frequency. Such requirements can appreciably increase the cost of operating the franchise, and franchisors are often unwilling to make exceptions, even for an outlet that’s not doing well. The franchisor believes that the value of its brand depends in good part on high standards and uniformity.
Franchisees in New Jersey are protected from arbitrary termination of their franchises by the New Jersey Franchise Practices Act. This law prohibits a franchisor from terminating or not renewing a franchise agreement except for failure of the franchisee to comply with the franchisor’s requirements. This means that even if the franchisor has valid business reasons for failing to renew an agreement with a New Jersey franchisee, such as that it no longer wishes to operate in a particular region, it cannot do so without paying the franchisee the fair market value of the franchise.
WARNING – There are additional provisions and requirements which apply to gas station franchises, and a different statutory regime which applies to car dealership franchises. These are not discussed here.
A BULK SALE NOTICE filing is a crucial piece of protection for the buyer of the assets of any business, whether franchised or not. The purpose of the filing is to inform the New Jersey Department of Taxation that all or substantially all of the assets of a business are being sold, so that the Department can be assured that the seller has paid all taxes due to the state before the assets with which he might pay those taxes pass out of his hands. The Department will respond to the filing by advising the parties of any taxes unpaid by the seller. Additionally, the Department will usually require a specified amount of the sale proceeds to be escrowed pending the seller’s filing of its tax returns for the current period. The amount of the escrow is based on the Department’s estimate of the taxes to be paid, plus a generous margin. Once they have been paid (or evidence that there will be no taxes due has been accepted by the Department), the Department will authorize the release of the escrowed proceeds to the seller.
The buyer is required by law to make the filing, and it is in his interest to do so. If no filing were to be made, and taxes were owed and not paid by the seller, the Department could collect those taxes from the new owner of the assets, the buyer. Needless to say, this is not what the buyer had in mind when offering to purchase the business.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning business transactions and all other legal matters, consult an attorney.
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Selling A Business (part 3) Franchises – Bulk Sale Protection
PURCHASE AND SALE OF A SMALL BUSINESS
UNDERSTANDING THE BUYER’S POINT OF VIEW – PART II
WHEN PURCHASING A FRANCHISE, a buyer has all the concerns pertaining to a non-franchised business, plus an additional set of concerns and obligations. The terms of the seller’s agreement with the franchisor will require the franchisor’s consent to the sale. In evaluating the transaction, the franchisor will consider the terms of the sale, the qualifications of the buyer, and the interplay between the (assumed or new) franchise agreement and any assumed or new premises lease. The franchisor will also require payment of a transfer fee and whatever else it generally requires from new franchisees. Many franchisors require that operators be trained and credentialed in operating the particular franchise. If the buyer is not already qualified as an operator, he may be required to successfully complete a training program which may last several days or weeks, before the franchisor will approve the sale. Additionally, the franchisor will require that the buyer meet its standards for financial soundness and good character.
When a franchise involves a business requiring extensive equipment, such as a restaurant, the franchisor often requires that all the standard and required equipment be included in the sale so that the new franchisee starts with a complete package. In the case of a seller who has been operating the business for a long time, there may be substantial gaps in the equipment, either because the seller has failed to replace lost or broken items or has replaced them with serviceable but non-standard items. Depending on how many and what kinds items are involved, replacement can constitute a substantial expense whose allocation the parties should keep in mind when negotiating the purchase and sale agreement.
Buyers should carefully consider the positive and negative aspects of purchasing a franchise as opposed to an independent business. The primary advantages of a franchise are obvious – name recognition, a following of customers who patronize that franchise, and tested Standard Operating Procedures. In attracting customers, the individual franchisee may benefit from licensed use of recognizable trademarks and trade dress, national or regional advertising, standardization and the proven track record of other franchisees. On the other hand, the franchisor’s royalties increase the franchisee’s monthly nut substantially. Contributions to advertising and marketing funds are often required, and the franchisor usually requires that equipment and procedures be kept up to date and in accordance with its standards.
In the case of a franchise dealing with the public, such as a restaurant, the franchisor usually requires renovation and redecoration of the premises on a set schedule, regardless of the profitability of the particular business, and may adopt new standards with startling frequency. Such requirements can appreciably increase the cost of operating the franchise, and franchisors are often unwilling to make exceptions, even for an outlet that’s not doing well. The franchisor believes that the value of its brand depends in good part on high standards and uniformity.
Franchisees in New Jersey are protected from arbitrary termination of their franchises by the New Jersey Franchise Practices Act. This law prohibits a franchisor from terminating or not renewing a franchise agreement except for failure of the franchisee to comply with the franchisor’s requirements. This means that even if the franchisor has valid business reasons for failing to renew an agreement with a New Jersey franchisee, such as that it no longer wishes to operate in a particular region, it cannot do so without paying the franchisee the fair market value of the franchise.
WARNING – There are additional provisions and requirements which apply to gas station franchises, and a different statutory regime which applies to car dealership franchises. These are not discussed here.
A BULK SALE NOTICE filing is a crucial piece of protection for the buyer of the assets of any business, whether franchised or not. The purpose of the filing is to inform the New Jersey Department of Taxation that all or substantially all of the assets of a business are being sold, so that the Department can be assured that the seller has paid all taxes due to the state before the assets with which he might pay those taxes pass out of his hands. The Department will respond to the filing by advising the parties of any taxes unpaid by the seller. Additionally, the Department will usually require a specified amount of the sale proceeds to be escrowed pending the seller’s filing of its tax returns for the current period. The amount of the escrow is based on the Department’s estimate of the taxes to be paid, plus a generous margin. Once they have been paid (or evidence that there will be no taxes due has been accepted by the Department), the Department will authorize the release of the escrowed proceeds to the seller.
The buyer is required by law to make the filing, and it is in his interest to do so. If no filing were to be made, and taxes were owed and not paid by the seller, the Department could collect those taxes from the new owner of the assets, the buyer. Needless to say, this is not what the buyer had in mind when offering to purchase the business.
DISCLAIMER – This article is for general information only and is not intended to provide legal advice or to address specific legal problems. This article does not create an attorney-client relationship. For legal advice concerning business transactions and all other legal matters, consult an attorney.