Acquiring a photography business

Our Case Study

We advised a client who acquired a studio portrait photography business which was part of a high-profile and successful national franchise (Business). For more information on franchises, see below.

Our client set up a limited liability company (Company) to acquire the Business and the deal was structured as an asset purchase.

There are two means of acquiring a business: via a share purchase or an asset purchase. A share purchase is where the buyer purchases the shares in a company from the company’s shareholders. If shares in a company are purchased the buyer acquires the company (and its business) as a whole, including all its assets, liabilities and obligations (even those the buyer may not have known about!). Share purchases are popular and are more tax efficient for the sellers.

However, in an asset purchase, the buyer purchases the assets that make up a business from the company itself. Asset purchases sound simple and are usually less risky: the buyer gets to cherry-pick the assets it wants.

Under the terms of the asset purchase agreement (Agreement), the Company acquired:

• assets, including photo equipment, the computer system and software and office furniture;
• employees (under TUPE) including the studio manager, photographers and telesales staff;
• goodwill;
• stock;
• certain intellectual property (but not the brand which was granted to the Business under the terms of a franchise agreement);
• business and customer records; and
• customer contracts.

Unlike a share purchase, in an asset purchase, not all of a business’s contracts transfer automatically (other than employment contracts as part of a relevant transfer under TUPE) so extra agreements and consents are often required (see below).   The Business was carried on at a studio leased by the seller but the lease was not capable of being transferred to the Company so the existing lease was terminated and the Company entered into a new lease of the premises with the landlord. In addition, the original franchise agreement under which the Business was carried on could not be transferred to the Company due to a change of control clause within the franchise agreement so this was terminated and our client and the Company entered into a new franchise agreement with the franchisor. The Business could not have continued without the franchise agreement; find out more about franchises below.

What is a Franchise?  

A franchise is the right to use a brand and other intellectual property to sell goods and/or services. The franchisor is the brand owner and the franchisee is the person (usually a company) to whom the right is granted.

The emergence of franchises began with tied house agreements between breweries and landlords and dealership agreements between vehicle manufacturers and car dealers. Modern day franchises include McDonald’s, Subway, Burger King, Europcar, Bennetton and Best Western and as far as the general public is concerned, the franchisee is the franchisor.

What are the advantages and disadvantages of a franchise?   For the Franchisor….   ADVANTAGES

• Fast distribution of products and services.
• Can use the franchisee’s capital to build its franchise.
• The franchisee is motivated which benefits the franchise as a whole.
• Increased purchasing power and reduced overheads means greater profitability.
• More likely to thrive in a recession than non-franchised businesses.

DISADVANTAGES

• Loss of control.
• Has to use some of its profits to support its franchisees.
• Release of know how and confidential information.
• Different skill set required to control franchisees, rather than employees.
• Owes a duty of care to the franchisees.

And for the Franchisee…   ADVANTAGES

• Provides an opportunity to run a business that may not otherwise be available.
• No need for general business or management skills or specialised knowledge – the operations manual included in the franchise agreement provides the franchisee with detailed procedures to follow.
• Using the franchise brand name and reputation – the franchisee may become successful more quickly than starting from scratch.
• Finance is usually more readily available than for new stand alone businesses.
• Risk of failure is usually reduced.
• Can make use of the franchise’s purchasing power.
• Benefit derived from the franchisor’s national advertising.
• Assistance and training provided by the franchisor during the term of the franchise agreement.

DISADVANTAGES

• Subject to substantial control by the franchisor.
• Obliged to pay royalties and/or a mark up on its products and services and/or a % of its revenue to the franchisor.
• Restrictions on the ability to sell the business or pass it on to a beneficiary on death.
• The business is directly affected by the actions of the franchisor e.g. if the franchisor fails, the franchisee is also likely to fail.