One of the biggest investments many people will make in their lives is buying a business. There are particular steps to be followed when this is a franchised business.
The steps listed in this article are those from a buyer’s point of view. They may not be all of the steps, and each Contract and transaction is different. This is meant as a guide only.
Step 1: Working out what you can afford
There are many costs involved in buying a business, particularly a franchised business. These need to be added to the cost of the business and included in your budget. Some of these costs include:
- the purchase price of the business and its stock;
- your legal costs for conducting the business transaction, checking the Franchise Agreement, and checking the Lease if it’s a site-based business;
- accountant’s fees for checking the business records and advising on viability;
- search fees, for checking the business to ensure it is unencumbered and various other searches such as town planning;
- bank application fees;
- bank guarantee/security bond for the landlord;
- stamp/transfer duty payable to the State government;
- training fees payable to the franchisor; and
- legal costs payable for the franchisor.
Step 2: Finding the business
Once you know how much you have to spend then you find the business. This is not an easy task and may take some time. Some people use ‘buyers agents’ who are business brokers specialising in assisting buyers locate a suitable business.
Step 3: Agreeing on the price
Sometimes it’s difficult to work out what you want to pay for the business if the seller won’t give you all of the financial information. Sellers can be reluctant to give out too much information until the Contract is signed (even if you’ve signed a Confidentiality Agreement). Buyers are reluctant to sign the Contract without the information. Therefore the Contract is generally subject to the buyer undertaking due diligence and checking the financials.
Step 4: Negotiating the Contract
Usually if there is a broker/agent, they will prepare the Contract and send it to either the seller’s solicitors or the buyer’s solicitors. The Contract will then be negotiated and amended until the parties are happy with it. There will be numerous conditions to be included such as:
- subject to due diligence;
- subject to searches;
- subject to the franchisor’s consent, completion of training and satisfactory franchise documents;
- subject to a satisfactory Lease (if it’s a site-based business);
- transfer of licenses needed to operate the business;
- arrangements for staff;
- arrangements for any leased equipment, and who pays out that Lease;
- transfer of any rented equipment such as drink fridges or ice cream freezers.
There are many things to be considered before the Contract is signed and it is strongly recommended that legal advice be obtained before signing the Contract.
Step 5: Signing the Contract
Before you sign the Contract, you must decide on your purchasing structure, such as sole-trader, partnership, company and/or trust. Your accountant and solicitor will help with this.
Because the buyer is making an offer to buy the business, they sign the Contract first. The broker/agent or buyer’s solicitor then presents the Contract to the seller’s solicitors for signing by the seller. A copy of the signed Contract is then sent back to the buyer’s solicitors.
Step 6: Paying the deposit
The buyer must pay the deposit when they sign the Contract. The deposit is held in the trust account of either the broker/agent or one of the solicitors. There are various clauses in the Contract that deal with the deposit. Generally if a condition in the Contract isn’t met, the deposit is refunded. If the buyer breaches the Contract then the seller may be able to keep the deposit.
Step 7: Notifying the franchisor
Once the Contract is signed, the seller must give a copy of the signed Contract to the Franchisor. The seller’s existing Franchise Agreement may contain a right of first refusal. This means that the franchisor must advise if they want to buy the business for the price set out in the signed Contract within a certain time.
Step 8: Making a finance application
If the buyer doesn’t have the cash to buy the business and if there isn’t vendor finance, the buyer needs to apply for finance as soon as they can. This may not be able to be completed until the buyer has all the financial information for the business. Banks will usually take at least 3 weeks to give finance approval. Banks should be given plenty of time, and any information required by the bank should be provided as soon as possible.
Step 9: Carrying out searches
The buyer’s solicitors will conduct searches at the appropriate time. If it’s a food business, that will include an application to transfer the food hygiene licence which will involve an inspection by the council of the premises to determine that the premises complies with the council’s health requirements.
There are many other searches that will be done which depend on the type of business being purchased. Some searches include:
- a search on the seller to see that they are properly incorporated if they are a company, or not bankrupt if they are individuals;
- Personal Properties Security Register (PPSR) searches to check encumbrances on the business assets;
- registered business name search with ASIC;
- trade mark searches with IP Australia;
- searches on the franchisor and landlord;
- title search on the premises; and
- town plan search to check that the business can be carried on in accordance with town planning laws (this is optional but always recommended).
Step 10: Due diligence enquiries and investigations
The standard REIQ Business Sale Contract in Queensland has a clause for verification of the business’ books and records. This is due within 10 business days of the date of the Contract. The seller must give accounts for the business within 3 business days after signing the Contract. That leaves the buyer only 7 business days to get the information to their accountant and verify the records.
In addition, the buyer should also have a due diligence special condition in the Contract so they can check the business assets and the plant and equipment, and ensure that they are all appropriate for the business and in good condition. Otherwise, the buyer takes the assets as-is. The Contract contains a warranty that the assets are all that are needed to operate the business and are working, however there are no guarantees as to how long they will work. That is something for the buyer to check during due diligence.
Once due diligence is completed, a written notice must be given to the seller whether or not they are satisfied with due diligence. If that notice isn’t given by 5pm on the due date, then the buyer is treated to be satisfied.
Buyers should be very careful about due dates. If you don’t think you can complete due diligence by the due date, then leave plenty of time to request an extension. The seller has no obligation to grant an extension and they may refuse. That leaves the buyer with a choice to either accept the due diligence or advise that it’s not satisfactory as it isn’t completed (and walk away from the Contract).
Step 11: Franchisor’s consent
If the franchisor doesn’t exercise their right of first refusal, the buyer will need to lodge an application with the franchisor to be approved as a franchisee. The application process will depend on the franchisor’s requirements and may involve one or more interviews and various other processes.
The franchisor has 42 days from the date they are given all the information they ask for to then advise whether or not consent is granted. If the Franchisor gives no answer within 42 days, then they are treated to have given consent. This time is set by the Franchising Code of Conduct (Code) and cannot be changed.
The buyer should ensure that they give the franchisor all the information required in a timely manner. This will include things such as the buyer’s asset and liability statements, qualifications, work history, references and why the buyer wants to be a franchisee in that particular franchise system.
Within 14 days of granting consent, the franchisor is entitled to withdraw their consent provided they have a reasonable basis.
Step 12: Buyer’s trial period
This is the time during which the buyer can attend at the business each day specified in the Contract for the purposes of verifying the trading performance. In other words, checking the takings of the business.
In a franchised business, generally the buyer can check the takings with the franchisor. However, if the business is not franchised then this is a way the buyer can check the takings to ensure the accuracy of the profit and loss statements.
The Contract must be specifically drafted to include a trial period.
Step 13: The Lease
If the seller leases the business premises direct from the landlord, then the Lease will generally be transferred/assigned to the buyer at settlement. The seller must provide a copy of the Lease to the buyer within 5 business days from the date of the Contract. The buyer then has 5 business days to review the Lease and advise the seller if it’s acceptable. If notice isn’t given then again the buyer is treated to have accepted the Lease.
Different requirements will apply if the buyer is getting a fresh new Lease instead of a transfer/assignment of the existing Lease.
Step 14: Disclosure Documents from franchisor
Once the buyer has been approved as a franchisee, the franchisor will provide Disclosure Documents. These will include:
- the Disclosure Document prepared in accordance with the Code;
- a copy of the Franchise Agreement in the form in which it is to be signed;
- copies of any documents the franchisor will require to be signed; and
- a copy of the Code.
The buyer cannot sign the final franchise documents until at least 14 days after they have received the Disclosure Documents. That 14 days is the time in which the buyer needs to read the documents and obtain legal and accounting advice on the terms of the proposed Franchise Agreement.
Generally, the Contract will be subject to the buyer confirming they are happy with the terms of the Franchise Agreement within 14 days of having received the documents.
Step 15: Signing the Franchise Agreement
Once the buyer is happy with the terms of the Franchise Agreement, the final franchise documents can then be signed. The buyer doesn’t have a cooling off period under the Code after they sign the Franchise Agreement. Therefore, it should only be signed if the buyer is certain they wish to proceed with the purchase.
Different franchisors have different procedures for when the final documents get signed. Many franchise systems require that the Franchise Agreement is signed before the buyer starts training. For a retail business, training can be many thousands of dollars. Therefore, the buyer should be sure that they are going to complete the purchase of the business and have satisfied themselves in all other respects before they start training.
Since the Franchise Agreement contains clauses regarding completion of training, protection of the franchisor’s confidential information and intellectual property, generally the Franchise Agreement is signed before training commences.
However, some systems do not require the Franchise Agreement to be signed then and leave it to be signed until after training. In that case the Franchisor generally requires the buyer to sign undertakings regarding confidentiality and intellectual property.
Generally, the buyer pays the cost of the training.
Step 16: Transferring the Lease
If the business premises is leased direct to the seller, the Lease needs to be transferred/assigned to the buyer. This cannot be done without the landlord’s consent. The seller must notify the landlord as soon as the Contract is signed that the business is being sold. The landlord will likely require a copy of the signed Contract.
In addition, the landlord will require an application form to be completed by the buyer which again will ask for statements of assets and liabilities, trading history and both personal and business references.
Landlords can take some weeks to grant consent and may grant consent subject to conditions such as a personal guarantee from the directors of the purchaser if the purchaser is a company. The buyer will need to give the landlord a bank guarantee or security bond at settlement.
The buyer’s solicitors will prepare the Transfer of the Lease and generally a Deed of Assignment for the Lease. That Deed contains an indemnity from the seller regarding outstanding money up to the date of assignment (meaning that’s the seller’s liability).
The landlord will also require a Deed of Covenant which binds the purchaser to the terms of the Lease. Sometimes the Deed of Assignment and the Deed of Covenant are combined into the one document by the landlord.
If the landlord’s bank has a mortgage over the property, then the mortgagee’s consent to the transfer of the Lease also needs to be obtained.
Again, different requirements will apply if the buyer is getting a fresh new Lease.
The landlord’s solicitors’ legal costs and the costs for the mortgagee’s consent are payable by the seller (unless the Contract’s special conditions say otherwise).
Step 17: If the Lease is in the franchisor’s name
If the head-Lease is held by the franchisor then the franchisor will generally give the buyer a copy of the Lease with the Disclosure Documents. The franchisor then enters into a Licence to Occupy with the franchisee which is an agreement allowing the buyer to occupy the premises and requiring the buyer to comply with the head-Lease. The Contract will set out whether or not the Lease is held by the franchisor or by the seller.
Many Leases signed by franchisors contain a right for the franchisee to change without the landlord’s consent. However, generally the landlord does wish to know that the franchisee is changing and will want to consent to the transfer of the business. The landlord may impose certain conditions.
Step 18: Retail Shop Leases
If the premises to be transferred are a shop governed by the State’s retail leasing laws, then there are various disclosure statements that need to be given. In Queensland, the Retail Shop Leases Act 1994 (Qld) will apply, and these documents include:
- an Assignor Disclosure Statement to be given by the seller 7 days before the Contract is signed;
- an Assignee Disclosure Document which is given by the buyer to both the seller and the landlord; and
- a Disclosure Document by the Lessor which is given by the landlord to the buyer generally with a copy of the Lease.
There are strict time limits under these laws about when the documents and notices need to be given, and the parties should ensure they comply with those time limits.
Step 19: Finance approval
If the Contract is subject to finance, then it will set a due date for the buyer’s finance approval. Notice must be given to the seller on or before the due date as to whether or not finance is approved. Again, extensions may be requested but the seller has no obligation to grant an extension.
When the finance approval letter is received from the bank the buyer should give a copy of that letter to their solicitor. The solicitor cannot confirm that finance is approved until the buyer receives a formal letter of approval setting out all of the conditions of consent and all of the terms of the loan. The solicitor will generally want to check that letter to ensure there are no conditions that cannot be complied with.
Once the buyer and the solicitor have confirmed that the conditions are acceptable, written notice is given to the seller by the due date that finance is approved.
Step 20: Signing the bank’s documents
Generally, the buyer’s loan documents are sent out with the loan approval letter so these need to be signed and given back to the bank in plenty of time before settlement.
Banks have procedures that must be complied with. They get the documents back, check them, then certify the loan as ready for settlement. It then goes to a different department to be checked and recertified, and then they’ll give a booking reference.
Without that booking reference, settlement cannot be booked with the bank. When time comes to book settlement, the bank will generally want 3 to 4 days’ notice. Banks are very strict with their time requirements.
Step 21: Training
Training is usually carried out before settlement. The buyer must go to training with the franchisor and this can take some weeks or even months. Generally, all documents are signed and everything is ready to settle, and the parties just wait until the buyer has completed training and until the franchisor certifies that training is satisfactorily completed.
Step 22: Franchisor’s settlement requirements
The franchisor’s consent will be granted subject to any transfer/assignment fee under the seller’s existing Franchise Agreement being paid by the seller and any money outstanding to the franchisor (including their legal costs) being paid. There will be other conditions unique to each franchise system.
When it comes to settlement, both the seller’s and buyer’s solicitors need to check with the franchisor to see how much money is to be paid to the franchisor on settlement. Settlement cannot proceed without the franchisor giving the final go-ahead for settlement.
Step 23: Utilities, website and social media
The solicitors do not get involved in the transfer of electricity, telephone and other utilities. This is done by the buyer and the seller direct. The buyer should ensure that they lodge their applications with the telephone company and the electricity company well before settlement.
The buyer and seller should also make arrangements between themselves to transfer the website domain name and any social media pages for the business on settlement.
Step 24: EFTPOS machine
Buyers should ensure they give the bank plenty of time regarding the EFTPOS machine, whether it’s to take it away or to get a new one. The seller will want to ensure that all money due to them is paid through their EFTPOS machine up until handover and the buyer will want to ensure they get all their money from handover. Discuss this with the bank early to ensure the EFTPOS machine will be available.
Step 25: Leased and rented equipment
Sometimes the equipment at the business premises is leased/rented. If that’s the case, then the seller must notify the company who leases the equipment and the buyer must apply to have the Lease transferred to them. This must be arranged to coincide with settlement. It’s generally arranged by the parties direct with the leasing company and the solicitors are not involved. The parties must ensure this is done before settlement. The buyer should have their documents checked by their solicitor before signing them.
Step 26: Employees
The buyer must choose which employees of the business listed in the Contract that the buyer wants to take on. The employees have no obligation to accept the offer of employment. The buyer cannot offer the employees less compensation than they were receiving with the seller.
For all employees except casual employees, adjustments are made at settlement for wages, holiday pay, sick pay, long service leave etc. The buyer needs to carefully check to ensure all these payments have been made and that the adjustments given are correct. The casual employees don’t have any entitlement to those type of payments and therefore no adjustment is made (however in limited cases long service leave may be payable).
The buyer takes on any employees with the rights that the employees had before settlement. For example, if the employee has been there for a number of years and would be entitled to pro-rata long service leave, then the buyer takes over that obligation.
Adjustments for employees are very technical and need to be looked at by an accountant to ensure that they are correct.
Step 27: Settlement figures
The solicitors will work out the settlement figures. These will include adjustments for things such as:
- rent and outgoings;
- employee entitlements;
- money payable to the franchisor;
- money payable to the landlord; and
- equipment Leases to be paid out.
Once the figures are confirmed, the seller’s solicitors will provide the buyer’s solicitors with cheque details. Cheques drawn at settlement cover such things as:
- any amount needed to pay out the seller’s bank;
- any amount needed to pay the landlord any rent or outgoings outstanding;
- the amount to pay the franchisor what they require on settlement; and
- the amount to pay the landlord’s legal costs.
The money at settlement must be paid by a bank cheque. The parties may alternatively agree to a telegraphic transfer (which is a same-day electronic funds transfer).
Step 28: Stocktake
The stocktake is usually carried out at close of business on the day before settlement, or sometimes on the morning of settlement. The parties meet at the premises and carry this out. If there is a lot of stock, then a stocktaker firm might be called in to assist. Sometimes the franchisor will attend the stocktake to ensure that the stock is there for the purchaser to open the business the next day.
The buyer has the obligation under the Contract to buy good and saleable stock up to the value specified in the Contract. There is no obligation on the buyer to buy any stock that doesn’t fit that description.
The stocktake amount is confirmed by the parties at the end of the stocktake and given to the solicitors on the morning of settlement and then included in the settlement figures. If that cannot be done, then the buyer pays the seller for the stock at settlement.
Step 29: Settlement
Settlement is the exchange of money for documents at a time agreed that suits the solicitors and the banks. This also includes the seller’s bank and other third parties providing releases of their security interests over the business.
Generally settlement is between 2pm and 4pm on the settlement date. There is no need for the buyer and seller to attend at settlement, they can leave that to their solicitors.
Step 30: Handover of the business
If the stocktake is done on the night before settlement, then the buyer opens the business on the settlement morning and is entitled to keep that day’s takings. The seller usually remains at the premises on that day until settlement occurs.
If for some reason the stocktake cannot be done until the night of the day of settlement, then the seller will operate the business on the settlement day and the buyer will take over the business at the end of the stocktake.
Step 31: GST
If the seller is giving the buyer everything necessary to operate the business, then it will generally be the sale of a going concern and GST will not be payable on the purchase price or the stock.
If for some reason it is not the sale of a going concern, then GST will be payable in addition to the purchase price and the seller will need to provide a tax invoice on settlement. The buyer should ensure they are registered for GST.
Step 32: Seller’s tuition
If the business is a franchised business, then many franchisors do not require the seller to stay and give tuition to the buyer after settlement. The Contract generally says that the buyer can get tuition for a week before and after settlement. This may be of assistance where the buyer is to be introduced to the customers. That assistance is given at no cost to the buyer.
Step 33: Stamp/Transfer Duty
In most States, stamp/transfer duty is payable on the sale of a business to the Office of State Revenue. In Queensland, the Contract must be stamped within 30 days of the Contract going unconditional.
This article isn’t meant to set out every possible step in the process or cover every possible event. It’s meant to give buyers and sellers an idea of the steps involved in the purchase of a franchise business from a buyer’s point of view, with a particular focus on Queensland Contracts. This shouldn’t be relied on as containing a full and complete record. You should ensure you obtain proper legal and accounting advice before entering into any documents regarding purchasing a business or a franchise.
The team at Salerno Law are experienced in acting for buyers and sellers of franchised businesses.
Get in contact if you need our assistance.
Luke has specialised in franchising law since his admission into practice and has acted for a diverse range of franchisors and franchisees of a variety of franchise systems. He is also an active member of the Queensland Law Society Franchising Law Committee where he keeps on the forefront of the latest developments in laws affecting franchising, and contributes towards submissions to government on topical issues facing the franchising industry.
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.