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Owning a business is an exciting and rewarding undertaking. However, with time, you may consider downsizing your business. When downsizing, you need to distinguish between selling your entire business or simply selling a part of your business.

For example, if you own a cafe and wish to sell, this can involve selling the entire business, including stock and equipment. Since the cafe is a location-based business, you will also need to transfer the lease to the purchaser. Alternatively, you and your company (Holding Pty Ltd) might own a business with multiple cafe locations around New Zealand. In this case, you can choose to sell any number of your cafes to a purchaser. 

This article will explain: 

  • the benefits and downsides of owning a business with several locations;
  • why you may consider selling all or part of your business; and
  • the processes for selling part of your business, including an asset or business sale, franchising and licensing.

Owning Several Locations

Benefits

Owning a business with several locations has many advantages, such as the ability to reduce overhead for management and training. It may be challenging to find suppliers. However, having a trusted supplier that can provide for multiple locations makes the stocking of your stores easier.

Additionally, your overall revenue will increase by owning a business with multiple locations, and your operating costs will decrease.

Drawbacks

Owning several locations also has associated risks. Firstly, if one of your business locations performs poorly or becomes involved in litigation, this can affect your entire business’ profits and image.

Moreover, if you have a small management team, concurrently managing multiple locations and employees can be difficult and overwhelming. If you are considering expanding your business, ensure that you have appropriate systems and management in place. If you are not planning to increase your systems or management, you may consider maintaining or downsizing your business.

Why Sell?

Many resources assist in business expansion, but there is not so much information about how to downsize or sell aspects of your business. There are many reasons for selling, including:

  • poor-performing locations;
  • the high cost of management;
  • difficulties finding skilled staff;
  • increased competition in the area; and
  • reducing risk and expenses.

What Is the Process When Selling?

First, you must decide if you want to sell one or more of your business’ locations. Following this, consider how to structure the sale. There are various ways to structure your sale, including:

  • an asset sale;
  • a business sale (branded or unbranded);
  • licensing; and
  • franchising.

Selling Assets

An asset sale is the least attractive way to sell one of your locations in terms of price. In an asset sale, you are not selling all of the assets of the business. Typically, this would occur where you are getting rid of a particular asset (i.e. an espresso machine) or selling all of the assets and equipment except for the intellectual property associated with the business. Another example may include selling the business’ equipment but not transferring the lease to the purchaser.

Typically, you would choose to undergo an asset sale if:

  • the lease has expired, and your landlord is unwilling to enter into a new lease; or 
  • you cannot find a purchaser for the business.

The sale price for an assets sale would only include the value of the assets, which does not include any of the business’ goodwill. Goodwill includes the business’ value above and beyond the depreciated value of the assets and equipment. 

Franchise

In New Zealand, there is no specific legislation that applies to franchising. However, other legislation applies, such as the Fair Trading Act 1986 (NZ). There is also an opt-in Code of Practice governed by the Franchise Association of New Zealand. With that said, franchising nonetheless is a highly structured type of business with potential for rapid expansion. Franchising allows a business to accumulate several locations with the purchaser (i.e. the franchisee) taking on most of the expenses. 

Additionally, as the franchisor, you collect a flat fee or percentages of revenue, among other options. Typically, the franchisee pays for everything, including the:

  • fit-out;
  • lease; and
  • the stock.

This model is less suitable if you are looking to sell one or two locations. This is because there is a higher set-up cost for the franchisor. Additionally, you must provide ongoing support to the franchisee.

Selling Unbranded

As the seller, selling unbranded is the easiest option as there will not be an ongoing relationship with the purchaser. However, the main drawback is that you may lose some of the value associated with the brand name and goodwill.

When selling unbranded, the purchaser takes over the lease. Consequently, they may retain some of the goodwill associated with the business at that location. This sale process will involve drafting a sale of business agreement, which sets out sale terms. After you transfer your business assets and meet all obligations under the sale of business agreement, the business relationship ends. Following this, the purchaser will continue to operate the business under a new name.

Licence Agreement

Another way to downsize your business is through a licence agreement. Adopting a licence agreement is the middle ground between franchising and selling unbranded. Licensing allows you to sell with the brand and associated goodwill, increasing the value of your sale. In this case, your licence agreement allows the purchaser to operate under the brand name for a set number of years.

Ultimately, a licence arrangement is one where:

  • you provide the purchaser with the right to operate under your name and logo; and
  • they conduct the business as they wish.

Selling under a licence arrangement is a good option if there is a lot of value associated with the brand name. It also allows you to continue to generate revenue from that location. However, the risk of licensing is that you cannot control the licensee in a structured way. Likewise, there is a risk that they might damage the image associated with your brand.

Key Takeaways

Ultimately, when you are looking to downsize your business, it is essential to understand:

  • your business’ value; and
  • whether you are looking to sell it in its entirety or just the assets.

Selling the assets of your business is an easy process but excludes all goodwill. Selling your business unbranded can allow you to increase your business’ value because you can transfer the lease. Likewise, you can increase goodwill by selling your business’ location and licensing the brand name. However, this extends your relationship with the purchaser, and you run the risk that they may damage the brand name. Further, franchising is an unusual way to sell when downsizing; however, if you can control the purchaser’s operation of the business.

There are many ways to downsize and sell your business. If you have any questions about which structure is right for your business, contact LegalVision’s business sale lawyers on 0800 447 119 or fill out the form on this page.

Frequently Asked Questions

What does downsizing involve?

When downsizing, you should consider the difference between selling your entire business or simply selling a part of your business. You may consider selling some of your business assets, like stock or equipment. If you have multiple locations, you may consider selling some of these. Alternatively, you can undergo a business sale and sell all of your business assets.

When should I start to consider downsizing my business?

There are many reasons for selling, including some of your business locations may be more poor-performing than other locations. You might also want to reduce your management costs or downsize because you are struggling to find skilled staff. Other reasons for downsizing include increased competition in the area or the desire to reduce risk and expenses.

I have decided to downsize. How can I structure my sale?

There are four ways you can structure your sale to downsize your business. Consider an asset sale, a business sale (branded or unbranded), licensing or franchising.

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