Buying a franchise business: share purchase or asset purchase?

When buying an established franchise business in Finland, you can acquire the same outlet in two fundamentally different ways: by purchasing the company's shares or an agreed package of business assets and operations. Your choice affects liabilities, funding requirements and the documents you need to review. If you are joining a franchise network, settle the deal structure before making a binding offer, rather than leaving it until the purchase agreement is being finalised.

1. Understand what you are buying under each option

In a share purchase, you buy shares in the company. The company operating the business remains the same legal entity. Its assets, debts, receivables and contracts generally remain with it. Risks arising from its previous activities also remain, even though ownership changes.

This does not mean that every company debt becomes your personal debt. However, the financial impact will be reflected in the value of the company you buy, its cash position and its ability to operate. For example, a payment obligation that comes to light later could divert money away from planned improvements.

In an asset purchase, the buying company acquires the business assets and operations defined in the purchase agreement. You do not take ownership of the selling company. The deal may, for example, provide for the transfer of specified assets and business-related rights. Historical debts do not generally follow the business in the same way as in a share purchase, but statutory liabilities and the requirements for transferring contracts must be assessed separately.

Ask the seller for written clarification at the outset: are they offering shares or the business itself, who is the seller, and who owns the rights being sold? The description “ready-to-run franchise business” does not define what the deal includes.

2. Focus due diligence on the risks of the deal structure

In a share purchase, due diligence needs to cover the company's history. The latest profit and loss account alone will not reveal the commitments the company has made or the claims it may face. It is advisable to have an accountant and a lawyer experienced in business acquisitions carry out the review together.

Ask to review at least:

• financial statements, up-to-date accounting records and a breakdown of debts;
• tax returns, tax assessment decisions and details of unresolved tax matters;
• security given, guarantees and other off-balance-sheet commitments;
• details of complaints, disputes and potential compensation claims;
• material contracts and their change-of-ownership provisions.

In an asset purchase, the main question is the scope of the deal: what exactly is being transferred to the buyer, and on what basis? Draw up a list of what is included and excluded. Establish which transfers require a third party's consent.

Under either option, check customer advance payments, gift cards, promised credits or refunds, and other outstanding obligations. If a customer has already paid for a service, someone must provide it after completion. Responsibility for this, and its effect on the purchase price, must be agreed in writing rather than left for the outlet's staff to resolve in day-to-day operations.

3. Compare total funding needs, not just the purchase price

The price of the shares and the price of the business assets are not directly comparable. In a share purchase, both cash and debts may remain in the company. In an asset purchase, the buyer may need separate funding for opening cash requirements, security deposits and other transition costs.

Prepare a calculation for each structure using the same completion date. Itemise the purchase price, funding the buyer must arrange, debts remaining in the company, available cash, professional fees and working capital. Ask the lender who will be the borrower and what security arrangements are appropriate for the chosen structure.

The tax treatment also differs. A share purchase may be subject to Finnish transfer tax. In an asset purchase, the allocation of the purchase cost across different assets affects the buyer's tax position, and the VAT treatment must be checked separately. Where certain conditions are met, a special rule may apply to the transfer of a business as a whole, meaning that it is not treated as a sale subject to VAT.

Do not choose a structure on the strength of a single tax advantage. Ask an adviser for an overall comparison that considers tax, debt and the cash needed to run the business together. The most favourable structure for the seller is not necessarily the safest for the buyer.

4. Align the structure with Finnish rules and the franchise relationship

Finland has no specific franchising act, mandatory registration of franchise agreements or statutory franchise disclosure document. This does not remove the obligation to provide material and accurate information before entering into an agreement.

Contractual relationships within a franchise network are governed by legislation including the Finnish Contracts Act, the Unfair Business Practices Act, the Competition Act and applicable EU competition rules. In a business acquisition, the Limited Liability Companies Act and tax legislation are also relevant. The applicable rules depend on the deal structure and what is being transferred. The network's code of ethics does not replace legislation or the terms of individual agreements.

The deal structure alone does not determine whether the franchise relationship will continue. In a share purchase, the contracting company remains the same, but the franchise agreement may require approval for a change of ownership. In an asset purchase, the buying company is a different legal entity, and you cannot assume that the seller's contractual rights will transfer. Obtain written confirmation from the franchisor of how your proposed structure will be handled.

5. Turn due diligence findings into deal terms

Due diligence is useful only if its findings inform the agreement. Ask your lawyer to include warranties from the seller about the accuracy of the information provided, along with a procedure for dealing with any undisclosed liability that emerges later. Agree limits on liability, deadlines for claims and any retention of part of the purchase price.

Specify the date on which financial balances will be calculated and how changes up to completion will be reflected in the price. Attach the agreed breakdowns to the purchase agreement. If a key approval or financing is still outstanding, agree how this will affect completion before committing.

Practical summary: choose the deal structure only once you know what will transfer, which liabilities will remain with the business you acquire, and how much money you will need after completion.