Buying a Franchise: Choosing Between an Asset Purchase and a Share Purchase

When buying an existing franchise business in Denmark, you need to do more than choose a concept and a franchise network. You must also establish whether you are buying selected assets or the shares in the company operating the business. This distinction affects your financial exposure to liabilities, which agreements can continue and what your advisers need to investigate before you sign.

1. Establish what is for sale

An asset purchase means that you or your company buy specified parts of the business. These may include fixtures and fittings, equipment, stock and goodwill. The purchase agreement must state precisely what is included and which liabilities, if any, the buyer will assume.

A share purchase means that you buy the shares in the company operating the business, such as the shares in an ApS, a Danish private limited company. The company remains the same legal entity, with its assets, agreements and liabilities. You become the owner of the company, rather than the direct owner of each item in the shop.

This distinction is crucial: in a share purchase, historical liabilities generally remain with the company you now own. They may affect the value of your investment, even though buying the shares does not, in itself, make you personally liable for the company’s debts.

Ask the seller to answer three questions early on:

• Who owns the assets used in the business?
• Which legal entity signed the franchise agreement?
• Is the proposed deal a sale of assets or a sale of shares?

A sales listing describing a ‘complete franchise business’ is not a sufficient answer.

2. Secure the right to remain in the franchise network

Buying a business does not, in itself, guarantee that you can continue trading under the chain’s name. The right to use the concept comes from the franchise agreement, not simply from owning the fixtures and fittings or the company’s shares.

In an asset purchase, you need to establish whether the existing franchise agreement can be transferred with the franchisor’s consent or whether the buyer must enter into a new agreement. Do not assume that the seller alone can promise you the right to continue operating.

In a share purchase, the contracting party normally remains the same. However, the franchise agreement may contain a change-of-control clause requiring approval when control of the company changes. You should therefore also review provisions covering indirect transfers and changes in ownership.

Denmark has no dedicated franchise legislation, no franchise-specific registration scheme and no statutory standard disclosure package that must be provided before an agreement is signed. The Danish Contracts Act and general principles of contract law apply, including the requirement to disclose material information where the circumstances call for it. The Danish Competition Act and other general rules may also be relevant.

Make completion of the purchase conditional on obtaining the necessary approval and establishing a clear right to continue operating the franchise. The approval should identify the buyer, the business premises and the agreement that will apply after completion.

3. Tailor due diligence to the purchase structure

For an asset purchase, your due diligence should focus particularly on confirming that the seller owns what is being sold and can transfer it on the agreed terms. Equipment may be leased, subject to security interests under a financing arrangement or owned by the franchisor. An inventory list is therefore not the same as proof of ownership.

Also check which essential agreements require separate consent to transfer. These may include the lease, service agreements and payment processing arrangements. A takeover will not work well if access to the premises is assumed but not legally secured.

Nor does an asset purchase guarantee that all historical liabilities will remain with the seller. For example, the Danish Transfer of Undertakings Act may mean that rights and obligations relating to employees transfer to the buyer if the relevant conditions are met.

For a share purchase, due diligence must cover the company’s entire history. Ask your advisers to review, among other things:

• Tax and VAT matters, including reconciliations with the accounting records.
• Debts, security interests and any guarantees.
• Outstanding claims, disputes and unresolved customer complaints.
• Balances and dealings with the seller, the franchisor and related companies.

The aim is not simply to identify problems, but to decide whether they should be resolved before completion, reflected in the price or addressed through specific provisions in the purchase agreement.

4. Compare the whole deal, not just the price

Two offers with the same headline description may represent very different financial transactions. In an asset purchase, you need to know which assets the price includes. In a share purchase, you need to understand how the company’s debts, cash and other balance sheet items are factored into the price.

Ask your accountant to compare the funding requirements and tax implications of the two purchase structures. The VAT treatment also requires a case-specific assessment; a business transfer should not automatically be treated as an ordinary sale of individual assets.

Have your lawyer translate the findings into clear contractual terms covering warranties, known risks and the handling of claims after completion. A warranty from the seller has limited practical value if the seller is later unable to pay a valid claim.

Practical takeaway: Establish the purchase structure before accepting the price. Then require a consolidated overview of what you are acquiring, the approvals needed and the historical risks that will remain in the business you are buying.