Before we will talk about franchise asset purchase agreement, let us first have a brief discussion, overview, and a background on franchising.
Firstly, as per Merriam-Webster dictionary, a franchise is the right or license granted to an individual or group to market a company’s goods or services in a particular territory or a business granted such a right or license. In simple terms, the franchise is an authorization by a company so that their products or goods or services can be placed in the market.
The franchise is a brand marketing strategy to expand your business throughout the country or the world by giving permissions to the investors or an entity to sell your product. In this way, your business can reach to different parts of the country or world even without you physically monitoring your products or services. It is like giving permissions to an entity to sell your product. But you have to take note that this is different from consignment and retail.
Franchise, consignment, and retail are terms almost similar to each other and are mostly confused by many. For clarity, here is a simple differentiation of the terms.
In brief, franchise differs from consignment in a way that in a franchise, you are a business offering the same business as that of the main company and you have to carry the name of the company, while in consignment, you have your own company name; you only hold the goods by another company and have a certain percentage if there will be sales promotion to the goods held on consignment.
Just like in consignment, retailers also retain their company name. Retailers buy the goods or services from another company and distribute these goods or services as their own, may it be the original form or they can process it further, but in a franchise agreement, franchisees are retaining the name of the franchisor and offering the very same product as that of the franchisor.
There are several franchises that you can avail of—convenience stores, restaurants, petroleum and gas, drug stores, and other services.
Supposing you are already having your franchised business with you as the franchisor and you are considering to end your franchise with the franchise through selling your franchised business to a third party. That is typically the scenario of a franchise asset purchase. And the business agreement binding this purchase is what we call franchise asset purchase agreement. Franchise asset purchase agreement is one of the agreements that most business usually have during the commencement of the operation.
Usually, the third party buying the franchised business is buying only the net assets. What are net assets by the way? Let’s take a quick peek of accounting’s most important equation: assets + liabilities = equity. Assets are the inflows to the entity, while liabilities are the outflows from the entity. Equity is the residual amount after deducting liabilities from the assets. So basically, by saying net assets, this means assets after deducting the liabilities, and this is similar to the term equity.
There are so many things you need to know about franchise asset purchase agreement, and although there is no really strict form in making a franchise asset purchase agreement, the elements that these purchase agreements have in common are the parties related to the purchase agreement such as the franchisee and the buyer, the recitals explaining the agreement and determining the positions of the buyer and franchisor, assets and liabilities assumed, earnest money and expenses, price of the franchise, conditions, and warranties, and covenants and other provisions.
The above discussion briefly discussed important things about a franchise and presented examples of companies which offer franchise nationwide. Whether you are the franchisor, franchisee, or the third party purchasing the franchise, it is worthwhile to understand those things before entering into an agreement.