Selling Your Franchise: Post-Closing Issues

Selling a franchise business is unique and presents issues not commonly found in the sale of an independent company. The process is complex, and while parties must pay particular attention to every detail throughout the sale, especially the franchise agreement, parties must also pay critical attention to post-closing issues. For example, when finalizing the sale of a franchise, a few questions to contemplate include: Will the seller provide post-closing consulting services? Has a consulting agreement been drafted? Have post-closing adjustments been agreed upon? And have post-closing tax liabilities been planned for? Below, we’ll discuss common post-closing issues and outline everything parties should know when finalizing the sale of a franchise.

Post-Closing Consulting Services

A post-closing consulting agreement eases the transition from seller to buyer. Sometimes, a buyer will request the seller stay on for a designated timeframe to provide post-closing services for the operation of the business. All details of this work need to be specified in a consulting agreement. This can greatly help the buyer as they get accustomed to the new business. The seller may receive payment for his consultation period, or payment may be included in the purchase price. Whatever the terms, the obligations of both parties during post-closing will be clearly laid in the consulting agreement.

A consulting agreement is often heavily negotiated and should include the following:

1. Specific services the seller will provide to the buyer. This may include the number of hours or days of the week seller is expected to provide services. This will also include the type of services the seller will provide. For example, will the buyer shadow the seller for a specified time, or will the seller simply provide training? In many cases, the seller will make themselves available on-demand. So if the buyer needs the seller’s assistance, the seller will be available to help. This gives the seller flexibility, so they don’t have to work a full-time shift.
2. The timeframe seller is expected to assist the buyer. The timeframe can range anywhere from 3 months to a year. Whatever it is, it should be clearly stated in the consulting agreement.
3. The compensation expected for services provided. Will the seller’s consultancy be paid above the purchase price, or will this payment be included in the purchase price? Negotiate this before the sale is final. There should be no surprised during the post-closing phase.
4. The consulting agreement should clearly state that the seller is an independent contractor, not the buyer’s employee.
5. Non-complete clause. Even if a non-compete clause already exists in the franchise agreement, the parties may want to include one in the consulting agreement as well. This prohibits the seller from competing with the buyer during the period of his consultancy work.
6. Non-solicitation agreement. Similarly to the non-compete clause, even if this exists in the franchise agreement, it’s a good idea to also include it in the consulting agreement. This prevents the seller from soliciting the buyer’s employees or customers during the consultancy period and for a period of time directly after the term.
7. Confidentiality provision. This keeps all information learned about the buyer’s business during the post-closing phase confidential.
8. Termination of the consulting agreement. What reasons are acceptable for either buyer or seller to terminate the agreement? Parties may also want to include a dispute resolution provision.

Post-Closing Adjustments

Post-closing adjustments are very common. The due diligence process and loan funding sometimes take months to complete. As a result of ongoing operations, assets and liabilities may fluctuate. The purchase price agreed on by both parties should ensure the buyer received post-closing operational capital to operate the business as it ran before the closing. There will likely be fluctuations in assets and liabilities between the date the purchase agreement is signed and the closing date. Therefore, the seller may need to adjust the investment to pay for the post-closing working capital requirements. The adjustments need to be calculated using the same accounting process used prior to the closing. In most cases, the adjustment will occur between 60 to 90 days after the closing.

Post-Closing Tax Liabilities

Both the buyer and seller must complete IRS Form 8594 and file the form with the IRS. This allocates the purchase price to the assets sold and determines the gain recognized by the seller and other transfer tax liability from the franchise sale. A buyer will want to allocate the higher value to quickly depreciating assets, like equipment. The seller will want intangible assets, like goodwill, to have a larger value because they will be taxed at a capital gains rate while hard assets will be taxed as ordinary income. The purchase agreement should address how any disagreements about the allocation of money plan to be resolved.

Post-Closing Winding Down

During the post-closing process, the seller should wind down its business according to its governing documents and applicable law. This may vary depending on the state and the type of business entity. Be sure to check local state laws.

Work with an Experienced Franchise Attorney

Selling your franchise involves many considerations and legal issues. Hiring an experienced franchise attorney can help you understand the complexity of franchise law and ease you through the selling process and into the post-closing phase. Contact us to schedule a consultation.