In this interview, we discuss an array of topics with attorney Julie Lusthaus, partner at Einbinder & Dunn. Ms. Lusthaus has been practicing law since 1996 and has substantial experience representing franchise and private business clients. If you have any questions regarding the legal aspects of buying, selling or appraising a franchise or private business, then this interview is a must read. Not only does Ms. Lusthaus cover the basics of buying and selling a franchise business, she also offers insight into the problems that could arise during the sales process, as well as important information such as a non-compete agreement.
Tina: I am selling my franchised business. I signed a franchise agreement, but the business is not producing any revenue; do I need an attorney to help with this transaction?
Julie: If you are looking to sell a franchised business, you will not only need to find a buyer but you will likely need consent from the franchisor. It is important to have legal advice and counsel prior to taking steps to finalize the terms with the buyer as the franchisor may have requirements for consent. Otherwise, you may spend time and money working on a sale only to find that the franchisor will not permit you to proceed.
Tina: What is the differnce between selling a business that is franchised and one that is not?
Julie: If you are selling an independent business, decisions about when to sell the business and to whom you sell the business are up to you. If your business is franchised, then the franchisor will have the right to approve the buyer and may also have the right to assess the sale price. You will not have the same freedom to sell that you do with an independent business.
Deals sometimes fall apart because after due diligence, the buyer wants to reduce the purchase price.
Tina: What are the benefits of buying a franchised business? What are some risks or issues that may arise when buying a franchised business?
Julie: A good franchise business is one that is a proven concept with brand recognition. It can be a turn-key investment whereby the buyer is given the recipe for developing and operating the business. However, the franchisor will have certain requirements that the buyer must meet in order to buy into the system. If a buyer is very entrepreneurial, a franchise may not be the best option because that buyer may want to implement his or her ideas rather than simply following the franchisor’s requirements.
Non-competition agreements are frequently used in an effort to prevent a seller from competing with the buyer.
Tina: What advice do you have for a business owner looking to sell his or her franchise?
Julie: If you own a franchise and want to sell the business, you should first review (or have counsel review) your franchise agreement prior to engaging with a buyer. Your rights to sell may be limited and the franchisor will likely require that you obtain its consent prior to the sale. Before you invest a lot of time and money negogtating with a buyer, you will want to ensure that the franchisor will not stop you from selling the business.
Tina: In your experience, what are the most common reasons that buyers do not go through with the sale of a business?
Julie: Typically, deals fall apart because after due diligence, the parties simply cannot agree on a price. Understandably, the seller will want to ensure that a buyer is serious before taking the business off the market and invest time and money in negotiations. In that regard, the seller will ask the buyer to agree to a price before engaging in significant due diligence. However, the buyer will want to ensure that the the price is fair and that can only be done after conducting due diligence. Deals sometimes fall apart because after due diligence, the buyer wants to reduce the purchase price.
Tina: I am selling my business, at what point do you recommend hiring an attorney and what role do they play in the process?
Julie: I would recommend hiring an attorney early in the process. Attorneys do more to help the parties get the deal done than simply “paper the deal.” There will likely be issues that the parties have not discussed that the attorneys will raise. The sooner that those are addressed, the sooner that the parties can ensure they are on the same page and the deal will get done.
You will not have the same freedom to sell [with a franchise] that you do with an independent business.
Tina: I am purchasing a business and I want to make the seller sign a non-compete agreement. I do not want the seller to open up a similar business in the same state for at least 10 years. Legally, can I do this? How about for a franchise owner?
Julie: Non-competition agreements are frequently used in an effort to prevent a seller from competiting with the buyer. Whether the agreements will be legally enforceable will depend in part on how they are drafted. It is highly recommended that you have an attorney knowledgeable in non-competition law draft the agreement to give you the best chance of precluding the seller from competing with you.
Tina: Do you have any other tips or advice for anyone buying, selling or appraising a franchised business?
Julie: The franchisor will provide you with a franchise disclosure document (“FDD”) prior to your purchase of a franchise (the franchise agreement will be an exhibit to the FDD). You can gain valuable information about the franchisor, the franchised business and the system by reviewing the FDD and its exhibits. It can also be helpful to have an attorney knowledgeable in franchising review the FDD. He or she can provide you with an understanding of the details of the offering. He or she can also tell you whether the franchise agreement contains standard provisions or provisions that are uncommon or particularly onerous.