Success Story

Coffee Franchise - Purchase of mobile coffee franchise system

Problem

Context

The franchise systems were established by 2 entrepreneurs each with a strong background in hospitality.  They had a vision to meet the growing consumer demand for mobile delivery of beverages. After initial research and development of the vehicle, at a time when this concept was new to the market, they operated some vans themselves and the business grew quickly.  Over time the systems have matured and the 2 entrepreneurs established other business ventures in the coffee industry including coffee shops and a retail coffee shop franchise network. 

After seeing the business flourish, a third party approached the founders and expressed their interest in purchasing the franchise systems. One of the founders was ready to move onto new ventures but the other was committed to develop the systems further.  He agreed to purchase the other founder’s shares in the franchise systems and become the sole director and shareholder.  
 
It was important to ensure that the sale was accepted by franchisees and did not cause any disruption to their businesses.  In a franchise system the franchisor’s most valuable asset is often the intellectual property in the manuals, trade marks and business names. The sale needed to transfer any rights the seller had in the intellectual property to the purchaser.

The 2 founders had a number of other business ventures together which they would both continue to be involved in. Our challenge was to design and implement a strategy for the departure of 1 of the founding partners from the Mobile Van Franchise System and Coffee Cart Franchise System which preserved his interest in the other business ventures and had minimum impact on the franchise systems.

The purchase was financed through a facility from a mainstream financier secured by personal guarantees from third parties and a mortgage over real property. The balance of the purchase price was financed by the seller.     

Objectives

• prepare the two franchise systems for a due diligence by a third party, in particular, to identify issues before the due diligence commenced;
• ensure franchise documentation complied with the Franchising Code of Conduct;
• ensure the seller transferred all intellectual property to the buyer;
• preserve the departing founder’s interest in other business ventures and identifying which assets in the group to be excluded from the sale;
• notify franchisees and suppliers of the change in ownership and control and minimise any disruption to them;
• ensure the finance arrangement did not breach the Corporations Act 2001;
• document the vendor finance arrangement; and
• ensure the interests of 3rd party guarantors were protected.

Why Us

We were selected by the buyer to assist with the purchase because of our long relationship with the founders and intricate knowledge of the franchise systems. We started providing advice to the founders when they first went into the coffee business. We drafted the legal documents which established the Coffee Van Franchise System, and later the Coffee Cart Franchise System, beginning with the Master Franchise Agreement which authorised the franchisor to use the systems’ intellectual property. 

We have had ongoing involvement with the franchise systems from their establishment and throughout all stages of growth. We prepare their Disclosure Documents, Franchise Agreements, and assist with the resolution of any disputes that arise with franchisees.

• ascertaining whether the franchise documents complied with the Franchising Code of Conduct. This was critical given the NSW Court of Appeal's decision in Ketchell v Master Education Services which suggested that any technical breach of the Franchising Code of Conduct by a franchisor would result in a Franchise Agreement being illegal and unenforceable.  This provided the seller an opportunity to address any concerns prior to the sale and determine any qualifications to be placed on warranties provided in the sale agreement;
• identifying, with the franchisor’s accountants assistance, inter-company and directors loans, that is, loans by the franchisor company to companies operating other business ventures and to or from the directors;
• examining the existing financial arrangements in place and ensuring any guarantees provided by the departing founder were released; and
• identifying all of the property owned by the seller which was to be assigned to the buyer.  Among other things, we compiled an inventory of all intellectual property including trade marks, business names, domain names and manuals, based upon our searches and information provided by the buyer.

This enabled the seller to package up the business into a more saleable item.

After the founders agreed to an internal sale, the next step was to liaise with the financier to ensure the loan documents did not breach the financial assistance provisions of the Corporations Act 2001, namely that the franchisor company did not secure the loan funding the share acquisition. We explained these provisions to the financier and the need to obtain security from an alternative source. We also had to document the terms of the vendor finance arrangement. 

We were then in a position to prepare a Share Sale Agreement and Unit Sale Agreement. These documents had to contain appropriate warranties given the relationship between the parties and nature of the business.

After the sale completed, the franchisees were promptly notified of the franchisor’s change in control and ownership in accordance with clause 18 of the Franchising Code of Conduct. The franchisor’s Disclosure Document was also updated to reflect the change.

Evaluation

Results and Benefits

We were in a position to document and provide advice regarding the share acquisition because of our prior knowledge of the franchise systems and the founders other business interests. Moreover our expertise in franchising puts us in a strong position in auditing franchise systems.