Lock, Stock and Barrel – achieving a clean break when you sell your business

1 December, 2018

Whilst maximising the sale price will usually be the main priority for the sale of your quick service restaurant business, sometimes the desire to “walk away” completely is also a key driver. Victoria Symons, partner at the law firm Cripps, considers whether this is possible and suggests practical steps to achieving it.

There are two main ways to sell your food-to-go business, either a share sale or an asset sale, but a share sale is usually more tax efficient for an owner-manager. In a share sale, the buyer acquires all the company’s shares and so the company comes with all assets, but also all of its liabilities (known and unknown, including debts, tax, legal claims etc.). In contrast, in an asset sale, the buyer can “cherry pick” the assets (and obligations) it wants to take and agree which will stay with the seller. For instance, the buyer may choose to take over some but not all of the business’ contracts. Crucially, in an asset sale, the operation of employment laws known as “TUPE” means that the employees, and all the employment liabilities, will automatically transfer to the buyer.

Out-of-home food service providers should be realistic that they are unlikely to achieve a purely “clean break” on completion in either an asset or a share sale. Even in an asset sale, a buyer will usually insist on the seller giving warranties (contractual statements about the condition of the business and/or its assets) and indemnities (obligations to pay for losses incurred as a result of a specific event happening).

The seller will only be liable for a claim for breach of warranty or under an indemnity for a set period of time. The length of this time period will be negotiated by the parties, but 1½ –  2 years for warranty claims and 7 years for tax claims are usual. As a means of ensuring a warranty or indemnity claim can be satisfied, the buyer may require part of the purchase price to be kept in a retention account for a period of time after signing. Therefore, the seller may not achieve an immediate “clean break”’ and may not receive the full purchase price on completion.

However, the seller’s liability for warranties and indemnities can be capped and the length of time during which a seller can be liable can be limited (other limitations on the seller’s liability can also be negotiated). On a more practical note, a seller can take steps to get their business in order before the sale by ensuring compliance with relevant laws, regulations (including minimum wage legislation) and ensuring items such as its statutory books are accurate and up to date, so reducing the risk of a warranty claim and the number of indemnities that a buyer will request.

For more information or legal advice on this matter, please contact John Kirkwood at john.kirkwood@crippspg.co.uk. 

This article first appeared in Out of Home magazine in December 2018.