While most buy/sell processes are typically between two parties (perhaps representing multiple shareholders), we do run into situations where there are unique regulatory, partnership or other parties that must be consulted with and/or their approval (or consent) required as part of a buy/sell. With large (often public) transactions, this often comes in the form of a competition review (CAD/US). Where Redcap&Truss sees this most commonly is with the sale of any sort of franchise type businesses where the “Corporate Office” has an approval right on a buy/sell.
The reason for an approval right should be obvious – while the owner of the business generally has day to day control over the business, they typically operate under the framework of a “sales and services agreement” (names vary by industry but the intent is generally the same) that dictates things like what support the Corporate Office provides in the form of inventory, marketing, training, etc. The Owner of this business is effectively representing the brand of the business on a day-to-day basis, so the Corporate Office wants to ensure that all owners have sufficient operating skills to run the business. The franchise owner has responsibilities as well – typically they cover things like maintaining a certain level of working capital in the business to ensure the business remains financially viable, maintaining customer sales and service levels, maintaining customer satisfaction scores (however that is determined), and ensuring branding stays up to date. Corporate Office in having this approval right on a buy/sell wants to make sure that any new buyer has the capabilities to maintain, if not significantly exceed, the minimum operating standards of a business. They don’t want to be in a situation where they have a weak partner (operating, financial, or otherwise) that may damage their business in a specific market.
So how and when are they notified and how does it create complexity in a buy/sell? What we typically see in most situations like this is that the owner is approached or finds a buyer and they negotiate a Letter of Intent (more on those here) that outlines the parameters of a transaction. Then, as diligence is taking place and definitive documents are drafted, a seller will notify (in writing) the Corporate Office of their intention to sell. This then triggers a review process by the Corporate Office on the buyer where they need to file an application for approval. These can be quite straight forward (typically a background check and operating/financial review) for smaller deals to lengthier reviews that involve multiple meetings reviewing business plans, forecasts and operating history.
The complexity comes from the fact that this application process (both timing and approval) is out of the hands of both buyer and seller and the deal is exposed to a new, third party that also has a stake in the outcome. If the buyer already has a strong relationship with the Corporate Office from other operations, they are generally seen as very “approvable” and the discussions are merely a formality, but where there isn’t that level of trust of familiarity, the situation effectively becomes a tri-party negotiation as to whether the buyer gets approved or if the Corporate Office effectively scuttles the deal.
In our next post, we are going to cover what we have seen as the most common issues that come up from a situation like this and how they can be mitigated or managed.
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