Recently, I had to get a haircut. During that procedure, my hairdresser and I usually talk about music – he plays the drums and I like to go to concerts. This time, however, he wanted to know what I as an attorney did all day.
Well, I draft contracts, for instance contracts for the purchase or sale of a doctor‘s office or a CPA practice or a toys store. In order to convince my hairdresser that this is the kind of work for which one should actually consult an attorney, we went through the points that ought to be included in a contract for the purchase or sale of a barbershop.
1. Subject matter
The subject matter of such a contract is „the barbershop“ itself, that is an aggregate of things and rights (inventory, goods, accounts receivable, liabilities, and so on). Also important is the goodwill of the business, that is in particular its customers. When drafting a sales contract, the parties should take particular care in describing that subject matter accurately.
This task is relatively easy if the barbershop has the legal form of a GmbH (= German limited liability company). In this case, you can just sell and transfer the shares from the seller to the purchaser. For that, we use – even in Germany – the English term „Share Deal“. My hairdresser, however, operates his shop as a sole proprietor. In this case, the only way to sell the business is by selling its assets (appropriately called „Asset Deal“ in Germany).
2. Purchase price
a) Inventory, goods and so on, that is the tangible assets, are relatively easy to evaluate. At what price were they bought? How old and in what condition are they? Can they still be used or sold? … – But maybe the purchaser does not want the old furniture and equipment but would rather have his own new design? In this case, there will be expenses for remodeling and renovation that should be taken into account.
b) Even more difficult is the evaluation of the customer base, that is the goodwill of the business. CPAs usually look at the capitalized earnings value, which they calculate by using the Discounted Cashflow method. Another popular method of calculation is the so-called „AWH Standard“ (AWH = Arbeitsgemeinschaft der Wert ermittelnden Betriebsberater im Handwerk). This usually leads to about 40 % of the annual revenue or earnings. More specifically, you take 40 % of the annual average of the last three years. – But be careful: If the customer base is tailored to the old owner, it may quickly disappear if the old barber is no longer there.
c) So in the end the purchase price is always a matter of negotiation, defined by supply and demand. If there is only one person that is interested in buying the shop, the purchase price will most likely be lower than if five people would like to take over the business.
3. Funding the purchase price, alternatives to a purchase and sales agreement
a) Of course, the purchaser always has to think about how he or she can pay the purchase price. Do they have sufficient capital of their own or will they have to take out a bank loan? Can the purchase price be paid in installments? Are there any programs for persons setting up their own business (founders )? …
b) If necessary, you should think about alternatives to a sales and purchase agreement. For instance, there might be a possibility to lease the business or to acquire it jointly together with another co-owner. The latter will lead to the formation of a partnership (for instance „GbR“) or company (GmbH or UG haftungsbeschränkt). There may also be the opportunity of a silent partnership (called „stille Gesellschaft“ in German).
4. And what will happen to the employees? (§ 613a BGB)
The purchase and sale of a barbershop is called a “transfer of business” („Betriebsübergang“) within the meaning of section 613a of the German Civil Code (BGB). That means that the employees of the old owner will automatically become employees of the new owner unless they explicitly object. The transfer of the company as such does not give the old or new owner the right to terminate the existing employment contracts. Consequently, when calculating what the deal will cost the acquirer, he or she should also take the ongoing personnel expenses into account.
5. Other contracts, for instance rental agreement
a) If the barbershop is operated in leased or rented premises, you should also take a closer look at the lease agreement. The reason for this is that the new owner will not automatically become a party of the existing rental agreement This rather requires the consent of the lessor, unless there is already a specific provision in the lease agreement. Be aware that the lessor is not obligated by law to renew or extend an existing lease agreement.
The acquirer should therefore take a good look at the existing lease agreement and, if necessary, talk to the lessor about a lease extension before signing the purchase agreement for the barbershop. As a matter of course, the value of the customer base or the goodwill of the shop often depends on whether the business may continue in the established location or not.
b) Also important: Make sure that the telephone number stays the same, because this is how customers usually make their appointments.
The purchase and sale of a barbershop is a rather complicated matter. Apart from the legal aspects mentioned above, there are also tax matters that have to be taken into consideration. And besides, it doesn‘t hurt if you have some negotiation skills on your side of the bargaining table.
So now my hairdresser knows how I as an attorney spend my days when I am not busy getting a haircut. …