Robbins: Licenses, franchises, and business purchases
There are many ways to acquire a business. Licenses, franchises, and business purchases are among them. Of course, rather than acquiring one, you can always start your own.
Let’s take the last of these first.
However daunting starting your own business may be, one thing you want to consider from the outset is how you want to operate your business. Do you want to be a sole proprietor, in partnership perhaps with your spouse or “bestie,” or to form an entity such as a limited liability company or a corporation?
While all may have their advances, the best advice from my 40-plus years of legal practice is to form and maintain an entity of limited liability: a closely-held corporation, limited liability company, or other similar structure such as a limited liability partnership. The reason should be obvious and contained within the name of many of these entities themselves; in operating, potential liabilities are “limited.”
“Limited,” however, does not mean absolute. What it does mean, generally, though, is if one day the unfortunate happens and the entity were to be successfully sued, the reach of liability is limited to the assets of the business itself and, absent unusual circumstances, will not reach the assets of the owner or owners. In this sense, entities of limited liability are like a policy of insurance, although insurance, too, is in most circumstances a must.
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A “license” is a “permission.” There are lots of uses of the term. First, a license may be the permission of an “authority” of one kind or another that confers a power upon the licensee. For example, a license granted by a state or municipality may confer a particular use upon the applicant. Licenses may also be granted by private entities or persons, for example, for the use of land, intellectual property, or some concern of one kind or another. At times, one may operate a business owned or maintained by another pursuant to a license.
What then of franchises?
Franchise is commonly used to refer to a relationship wherein a business organization, called the franchiser, in exchange for a fee and with the franchisor’s guidance, allows another business, called the franchisee, to operate under the franchiser’s trade name and offer the franchiser’s products or services. Think of McDonald’s, Burger King, Taco Bell, and about a zillion others. The franchisee purchases the franchise from the franchisor, runs the business with the franchisor’s assistance and according to guidelines that are terms material to continuing to own and operate the franchise. For example, without permission from the franchisor, a fast food franchisee may not deviate from the dictated menu items or processes for their preparation.
Business acquisitions are generally of two types: stock or membership purchases, or asset purchases.
If one wishes to acquire an ongoing limited liability company (an LLC), lock, stock, and barrel, one would generally do so by the device of a membership purchase agreement. Similarly, if it were a corporation one were acquiring, the analogous device would be a stock purchase agreement. In the former, one is acquiring all of the memberships in the LLC. In the latter, one is acquiring the stock.
While in the right circumstances this can make sense — for example, the entity will continue uninterrupted and to outside observers there may appear to have been no change at all — a potential downside in such an acquisition is that one is acquiring not only the assets but also the liabilities. Thus, the reason I used the phrase “lock, stock, and barrel.”
If, however, what one wishes to acquire is the golden nuggets of a business, but not the crumbs, if the seller is willing, a buyer can cherry-pick precisely what they wants to buy. “I want this, but not that.” And one thing a buyer generally does not wish to acquire is the trailing liabilities of the ongoing concern.
Of course, almost every upside has a downside. If what one is buying is only the “stuff” but not the business itself, and when among the things that one may acquire is the name and “goodwill” of the business, in some sense, the continuity is not as seamless as in a stock or membership purchase.
So, what to do?
Regardless of how you may wish to make your mark in commerce, due diligence is essential. Whether you are opening up something on your own or acquiring an ongoing concern or franchise opportunity from another, doing your homework is key. Are the opportunities precisely what they seem? What are the restrictions and the limitations? Perhaps as importantly as anything else, what do the books look like? If the seller is underwater, what, realistically, makes you believe that you can rescue it and make it float? Does the price reflect the risk?
Good advisors, be they legal, financial, or accounting, can help identify, appreciate, and hopefully reduce the risk.
There are joys and rewards in business ownership. There are potential fortunes to be made. But, before you plunge in, have your eyes wide open and your wits about you. While there are abundant opportunities to be sure, so too are there landmines.
Rohn K. Robbins is an attorney licensed before the Bars of Colorado and California who practices in the Vail Valley with the Law Firm of Caplan & Earnest, LLC. His practice areas include business and commercial transactions; real estate and development; family law, custody, and divorce; and civil litigation. Robbins may be reached at 970-926-4461 or Rrobbins@CELaw.com. His novels, “How to Raise a Shark (an apocryphal tale),” “The Stone Minder’s Daughter,” “Why I Walk so Slow” and “He Said They Came From Mars (stories from the edge of the legal universe)” and “The Theory of Dancing Mice” are currently available at fine booksellers.
