Selling a Business But Keeping an Asset
13 June 2022: Selling a Business But Keeping an Asset
We occasionally are asked by selling clients about whether or not they can sell their business but hold on to one or more of the assets owned by the business.
The answer, of course is, “yes”. But it’s a qualified “yes”.
If the asset isn’t generating any of the business’ revenue, there’s not much of a problem. But if the asset has a role in generating any revenue, the seller can keep that asset as long as the seller is willing to accept a reduction in the negotiated price by the amount it will cost to replace that asset. After all, if the asset is used by the business to generate the revenue and earnings on which the value is based, the business has to have the asset – or one to replace it.
Now, that’s a very simple answer to a question that is often freighted with emotion. But in most such instances, the assets fall into one of two categories, the example above being the first. The second category is a little easier to pull off.
Arguably, the most basic example of one of these is a business owner whose business provides him or her – and possibly their spouses, wayward children and distant relatives – with a vehicle. In our experience, this is common practice with the owners of profitable businesses. If the owner wants to keep the Mercedes or Lamborgini we advise them to buy it from the company. Get it off the balance sheet, re-title it and remove it from the asset list. Easy, peasy, right?
The financial performance of the business doesn’t require that Mercedes or Lambo anyway – and besides, the buyer might just as easily be a Lexus fan!
A Case Study
But a very interesting situation landed in our laps not too long ago. A woman who started a retail business that had become very successful wanted to sell that business. But she wanted to keep the name.
Not that she had any plans for the name after the sale, but “just in case”.
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Needless to say, we advised her that her business was successful operating under its existing name and that without that name the value of the business would be significantly reduced. The broker that valued the business before this little hiccup popped up arrived at a value of $2.7 million and suggested a market price of $2.95M. (Those of you who have taken our Course know how we got there.)
No one knew how much the revenue and earnings would be impacted if the name – as well as the ownership – was changed but we all knew both would be lower than the business currently generated. Naturally, the business would be worth less. After several lengthy discussions, the owner finally accepted that fact – but would not accept a reduced price for her business. This, needless to say, presented us with a quandary.
How do we sell a business at its full value but allow the seller to keep one of the most important assets that support that value?
The name of a business is, in almost ALL circumstances, one of a business’ most valuable assets. This is especially true in retail. And even MORE especially if the business is a “destination” business rather than an “impulse” business; that is, the name is the draw. And in this case the business was both. We had to come up with ways that would allow the seller to keep the name, allow the buyer to use the name, prohibit the seller from devaluing the name (by, for example, using it in a new business whose product or service is socially repulsive) and prohibit the buyer from using the name in any other business venture or in other locations.
There were two solutions and they happen to be related.
Franchising is basically a method of expanding a business using other people’s money.
Think of almost any fast food chain, tax-preparation system, home health network – or any other chain of small businesses with dozens or hundreds of locations. Chances are these businesses are mostly – or even entirely – franchised units of one corporate entity that owns the intellectual property (IP); the name and detailed method of doing business.
The franchisor – the corporate entity – maintains strict control over all aspects of how each of its franchisees – the people who own and operate the individual units – function. From how the employees dress, what hours of operation are required, how much the fish sandwich weighs and where the chicken nuggets come from, the franchisor is usually calling the shots.
Many franchisors make money by dictating which suppliers of all the “stuff” a franchisee must buy from to operate; from the company that makes the counters and the tile on the floor to the uniforms on the employees and the special sauce on the burgers. This additional revenue can be in the form of commissions the vendors pay to the Franchisor or by virtue of the Franchisor owning all or part of a subsidiary that franchisees must buy from.
At the same time, the franchise agreement generally prohibits BOTH parties from using the identifying trademarks – the brand – that might cause confusion in the minds (such as they are) of the public or damaging the brand in any manner. McDonald’s, for example, would not be able to open a chain of gun shops using the ubiquitous golden arches. (Though it might get away with “Ron’s RAPID-FIRE RIFLES” using the picture of a clown as part of its branding. But I digress…)
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But franchising is a business, pure and simple. It takes a lot of work, requires quite a few employees to enforce the provisions of the franchise agreement, come up with new products or services to offer, create advertising campaigns in support of the franchisees’ businesses and essentially oversee a growing chain of businesses run by independent franchisees who, by their inherent entrepreneurial nature, want to do things their way (to paraphrase a Whopper Burger tagline).
Licensing, on the other hand, seemed to offer a potential solution to our problem.
By removing the brand name from the sale and placing it into another entity, the new entity could license the brand back to the business and, thus, to the buyer of the business. This seemed to be the best solution to our client’s problem – and is, in fact, exactly what we did shortly after starting Worldwide Business Brokers back in 2001.
Because my background was in franchising, that’s how Worldwide was started – as a franchisor. But I realized early on that operating a franchise system required more work than I wanted to do, more employees than I wanted to ever again have, more lawyers to comply with the myriad laws on franchising from state-to-state (let alone from country-to-country) and more rules and regulations that had to be promulgated, revised, updated and, at least in the United States, repeatedly vetted to meet the proper level of political correctness that was in fashion on any given day. We assumed that, with the proper vetting of potential licensees and the proper training, pretty much everyone who went through our Course could be trusted to perform with honesty, integrity and professionalism.
And after more than 20 years, we’ve not been disappointed.
Licensing allows the licensor – in this example, the owner of the brand – to retain ownership of that brand but does not necessarily require the licensor to do anything. In fact, other than an affirmative obligation not to damage the brand, the licensor can just sit back and, in most instances, collect licensing fees.
Here’s how it worked with our client (though all names have been changed to protect the guilty).
The business, The Bleu Dog (a whimsical name for a business that sold unbelievably delicious baked goods and was totally unrelated to any political party), was owned by “Liz Bleu”. Our recommendation to Liz was to establish a separate entity and transfer the brand asset – trademark and identifying graphics – to that new entity. Following our advice, she established TBD, LLC and transferred the brand – which included the name, The Bleu Dog, and logo to TBD. She then created a license agreement whereby TBD, LLC allowed Liz, as owner of The Bleu Dog to use the brand on certain terms. The license in this case was transferable which allowed Liz to sell The Bleu Dog pâtisserie with the license to use the brand, thus giving the buyer the right to use the brand which, if the buyer maintained other levels of confidentiality, would essentially eliminate customer confusion.
It also allowed Liz to retain ownership of the brand.
The Bottom Line
Selling a business but keeping an asset – especially one as important as the business’ brand – is possible but structuring the business before structuring the deal is where the idea lives or dies.
In this unique case, the business owner wanted to sell, move away and consider what – if anything – she might want to do in business in the future. Of the possible solutions, licensing requires FAR less oversight than franchising does, a fact that was very important to our client (as it was to me shortly after I started Worldwide Business Brokers).
She liked the name of the business she was selling – perhaps because it was her first business venture or because she was so successful in that venture – and she may do nothing with the name in the future. But TBD, LLC will own some intellectual property – The Bleu Dog brand – that, absent a catastrophic decision at the hands of the buyer of the business, should have some value to her and perhaps others for some period of time.
There’s always a way to sell a business and, unlike residential real estate, rarely are two deals alike. Most need a certain amount of creativity in at least one aspect of the deal. In this case, Liz was able to get the full value of her business and still retain ownership of the name.
In most instances, creative thinking goes a long way in figuring out the best way to help our clients reap the rewards of years of hard work and help the buyers get structured for their own success. After all, those buyers are going to become sellers at some point down the road.
If you have any questions or comments on this topic – or any topic related to business – I’d like to hear from you. Put them in the comments box below. Start the conversation and I’ll get back to you with answers or my own comments. If I get enough on one topic, I’ll address them in a future post or podcast.
I’ll be back with you again next Monday. In the meantime, I hope you have a safe and profitable week.
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The author is the founder, in 2001, of Worldwide Business Brokers and holds a certification from the International Business Brokers Association (IBBA) as a Certified Business Intermediary (CBI) of which there are fewer than 1,000 in the world. He can be reached at joe@WorldwideBusinessBlog.com