Store Buying and Selling



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March 4, 1996

Legal Counsel
By Christopher J. Gulotta

Store Buying and Selling

Buying and/or selling franchised stores has advantages and disadvantages that operators should know before sealing a deal

By: Christopher J. Gulotta

FRANCHISED convenience stores, like other types of franchised retail businesses, have certain inherent advantages and disadvantages. For first-time c-store owner/ operators in particular, there is a great attraction to buying a franchised store because of the established trade- mark, goodwill, operations and sales formulas, and initial and ongoing support.

Some of the restrictions and ongoing fees associated with franchised stores, however, prompt more and more successful and experienced c-store operators to venture out into the world of independent stores, by either buying an independent c-store, or developing their own store concept from scratch.

In my law practice, I have seen this evolution, whereby entrepreneurs new to this retail format have opted to accept some of the limitations and restrictions associated with owning a franchised c-store and then later - when they are confident they understand the key issues associated with, the successful operation of a c-store-either buy or open their own independent store or chain.

Buying a Franchised Store

Assuming that you have decided to buy a franchised c-store, the following should serve as a good initial checklist that can be utilized when you meet with representatives of the various franchised chains and when you negotiate with the current owner of the particular store that you are contemplating buying:

Why are you considering this particular franchise?

Have you considered other franchises?

What is the franchiser going to provide by way of initial training and ongoing sup- port? What is included in the ongoing franchise fee? What is the fee amount? How is it calculated?

How many years of experience does the franchiser's sales representatives have who would be providing you with ongoing support?

Has the franchiser filed an offering circular with the State Attorney General's Office? Are they in good standing?

What are the stated obligations of the franchisee, both initially (franchise fee and training fee) and ongoing (record keeping, hiring and firing employees, etc.)?

What are the unstated obligations of a franchisee? Beware of broadly phrased terms such as "franchisee shall pay all other fees" or "franchisee shall pay all other taxes." Identify all of these fees and taxes up-front and have your accountant determine the precise amount of each.

Determine whether the following franchisee rights are in the franchise agreement: notice of default and right to cure.

Review the proposed Franchise Agreement with your attorney, business consultant and accountant.

Phase one. When considering acquiring a c-store, ask yourself the following questions:

What are your short- and long-term goals (financial and personal)? Why do you believe that buying a store will serve to achieve those goals?

Do you understand the risks associated with buying and operating a retail food business? Have you ever worked in a c-store before?

Have you prepared a business plan that compels you to consider all of the relevant issues, thereby identifying in advance your strengths and weaknesses?

Are you currently in a position (financially, personally and experience-wise) to go for- ward and commence the due diligence process?

Phase Two. Once you are confident you have a good perspective on the endeavor and are pre- pared to proceed with the preliminary negotiations, ask yourself the following questions:

On what basis has the seller determined the purchase price? How does he or she justify it?

How extensive was your due diligence (investigation) into the business in question?

What is the advice of your counselors? Have you conducted a trial run in the convenience store you plan to buy?

Why is the seller selling the business? Although every seller will have any number of seemingly acceptable reasons why he or she is selling and why you are getting a great deal, remember the seller's job is to overvalue the business and possibly dispel any concerns that you have or should have about the value, profitability and/or viability of the business. Keep in mind owners are more likely to sell their business when it is troubled, rather than when it is thriving.

Phase Three. It is imperative that you not narrow your focus to any one business. For negotiating leverage and added perspective, you will be well served to consider a number of other possible target convenience store businesses. Once you have narrowed your search to a few c-stores you can commence a more thorough and detailed due diligence investigation.

Phase Four. Before going to contract, have your counselors conduct their respective due diligence. By doing this before negotiating the terms of the contract, your attorney will be armed with the respective insights of your other counselors and will be better able to identify and address the apparent and not-so-apparent risks associated with this business, which could significantly reduce your exposure.

Selling a Franchised Store

Assuming you are presently considering selling your franchised c-store, consider the following summary checklist of threshold questions, issues and considerations:

Does the franchiser have a right of first refusal? If so, for what period of time?

What are the requisite qualification, approval and training procedures required by the franchiser?

What are the "close out" procedures of the franchiser and what fees and/or work are required of the seller? Look for the franchiser to hold all or a portion of the sale proceeds in escrow until a final audit of the seller and seller's store, has been conducted.

In the event that a portion of the purchase price is paid by way of a promissory note by the buyer, if he or she subsequently defaults, will the franchiser give you prompt notice? Will you be permitted to reenter and resell the business? If not, consider requiring the entire purchase price to be paid at closing.

The lease. Obtain landlord/franchiser release and secure a right to immediately re-enter the premises in the event of purchaser's default.

Contracts of seller. Assign any existing agreements to the buyer (for example, equipment leases), and in the event you are required to remain liable under such agreements, obtain adequate and meaningful security for same from the buyer.

There is a great attraction to buying a franchised store because of the established trademark, goodwill, operations and sales formulas, and initial and ongoing support.


Copyright 2001 The Gulotta Law Group, PLLC

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