Buying a NZ Franchise: Asset Purchase or Share Purchase?

When buying an existing franchise in New Zealand, establish exactly what you are buying before assessing the deal. An asset purchase and a share purchase can put you in charge of the same outlet, but leave you with very different legal and financial exposure. The distinction should shape your due diligence, professional advice and negotiations from the outset.

1. Identify the proposed purchase structure

In an asset purchase, you or your purchasing company acquire specified business assets from the seller. The sale agreement should identify what is included, what is excluded and which obligations you agree to assume. The seller’s company does not become yours simply because you buy its business.

In a share purchase, you acquire shares in the company that operates the franchise. That company remains the same legal entity: it continues to own its assets and remains responsible for its liabilities. You acquire ownership of a company with a history, rather than just an agreed package of business assets.

Ask the seller to confirm:

• Who owns the operating business and who is selling?
• Are you buying identified assets or shares in a named company?
• If shares, are you acquiring all of them or only a proportion?
• Which entity holds the franchise agreement and other essential contracts?

Do not assume that an advertisement for a “franchise business for sale” answers these questions. Ask your lawyer to explain the proposed structure before you sign an offer or preliminary agreement.

2. Match due diligence to the liabilities you could inherit

With a share purchase, investigating the company’s past is particularly important. Its existing debts, tax obligations, contractual commitments and potential claims do not disappear when its shareholders change.

Request accounts, tax records, borrowing details, significant contracts and information about disputes or threatened claims. Have your accountant reconcile the financial position with supporting records rather than relying solely on a summary supplied for the sale.

Also ask about transactions with the seller and related parties. For example, does the company owe money to a departing shareholder? Will that balance be repaid, transferred or otherwise dealt with at completion? The answer can change the effective cost of the acquisition.

An asset purchase may allow you to leave many historical liabilities with the seller, but it is not an automatic clean slate. Obligations can arise through the purchase agreement or applicable law. Assets may also be subject to security interests that need to be released.

Ask your advisers to prepare a simple liability schedule showing:

• Obligations remaining with the seller.
• Obligations you expressly assume.
• Possible liabilities requiring further investigation.
• Matters requiring a release, settlement adjustment or contractual protection.

Keep this exercise separate from deciding whether the outlet is profitable. A commercially attractive business can still carry unacceptable acquisition risks.

3. Check franchise consent and the New Zealand legal framework

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or dedicated franchise registration requirement. General laws apply, including contract law, the Fair Trading Act 1986 and the Companies Act 1993 where a company is involved. The Fair Trading Act prohibits misleading or deceptive conduct in trade; it is not a substitute for investigating the transaction.

The Franchise Association of New Zealand’s codes bind its members, although membership is voluntary. Their requirements are not legislation applying to the whole franchise community.

For an asset purchase, establish whether you need a new franchise agreement or an approved assignment of the existing agreement. Buying the outlet’s assets does not itself grant permission to operate under the brand.

For a share purchase, do not assume consent is unnecessary because the franchisee company stays the same. The franchise agreement may treat a change in ownership or control as an event requiring franchisor approval. Other important contracts may contain similar provisions.

Have your lawyer identify every required approval, the relevant conditions and any associated charges before you commit.

4. Compare the complete deal, not just the price

Ask your accountant to compare the tax and funding consequences of each proposed structure, including GST treatment where relevant. Do not assume that buying a trading business automatically makes an asset sale zero-rated for GST; the statutory conditions must be satisfied.

For a share purchase, clarify how cash, debt and shareholder balances affect the price. For an asset purchase, check how the price is allocated between the assets being acquired and whether that allocation is supportable.

Your lawyer should then assess appropriate warranties, indemnities and other protections. These are only as useful as their wording, enforceability and the seller’s ability to meet a claim. They should support due diligence, not replace it.

Practical takeaway: Before comparing offers, ask your lawyer and accountant for a written summary of what you will own, which liabilities you will bear and which approvals are required. Settle the purchase structure before treating the headline price as the cost of the deal.