What accounting basis is used to determine the purchase price of a Cream shop?
Cream Franchise · 2025 FDDAnswer from 2025 FDD Document
We have the option to purchase any or all of the assets of your Shop, including your Premises (if you or one of your owners or affiliates owns the Premises) upon termination or expiration of this Agreement. We have the unrestricted right to assign this option to purchase. We may exercise this option by giving you written notice within 30 days after the date of such termination or expiration. The purchase price for your Shop will be the net realizable value of the tangible assets in accordance with the liquidation basis of accounting (not the value of your Shop as a going concern). If you dispute our calculation of the purchase price, the purchase price will be determined by one independent accredited appraiser designated by us who will calculate the purchase price applying the criteria specified above. We agree to select the appraiser within 15 days after we receive the financial and other information necessary to calculate the purchase price (if you, and we have not agreed on the purchase price before then). You and we will share equally the appraiser's fees and expenses. The appraiser must complete its calculation within 30 days after its appointment. We may set off against the purchase price, and reduce the purchase price by, any and all amounts you or your owners owe us or our affiliates.
Source: Item 23 — RECEIPTS (FDD pages 61–192)
What This Means (2025 FDD)
According to Cream's 2025 Franchise Disclosure Document, if Cream exercises its option to purchase a franchise location upon termination or expiration of the franchise agreement, the purchase price will be based on the net realizable value of the tangible assets. This valuation will be determined using the liquidation basis of accounting, not the value of the shop as a going concern.
This means that the franchise will be valued based on the estimated amount that could be received from selling its assets in a liquidation scenario, rather than the value of the business as an ongoing, profitable operation. This approach typically results in a lower valuation than if the business were valued as a going concern, as it focuses on the immediate resale value of assets rather than the potential for future earnings.
If the franchisee disputes Cream's calculation of the purchase price, an independent appraiser designated by Cream will determine the price based on the same liquidation basis of accounting. The costs for the appraiser will be shared equally between Cream and the franchisee. Cream can also deduct any amounts owed by the franchisee or their owners to Cream or its affiliates from the purchase price. This could include unpaid royalties, fees, or other debts. The appraiser has 30 days to complete the calculation after their appointment. Cream has 15 days to select the appraiser after receiving the necessary financial information if the parties have not agreed on a price beforehand.
Prospective franchisees should understand that this valuation method could significantly impact the amount they receive if Cream decides to purchase their shop at the end of the franchise term or upon termination. It is crucial to carefully review the terms of the franchise agreement and seek professional advice to fully understand the potential financial implications of this clause.