These two transaction types come with distinct implications for your finances, legal risks, and relationship with the franchisor. Let’s explore both options in straightforward terms to help you decide which path aligns best with your goals.
Understanding asset purchases
In either scenario, an asset purchase deal or an a share purchase deal, the buyer will need to sign a new franchise agreement with the franchisor. This means going through their approval process, which might include training, paying fees, and reviewing a disclosure document (required under Ontario’s Arthur Wishart Act). This document gives you key details about the franchise system, and you’re legally entitled to receive it at least 14 days before signing anything.
In an asset purchase, you’re buying specific pieces of the business—like equipment, inventory, and other assets but not the company itself. A major advantage of an asset purchase is that you generally won’t inherit the seller’s old debts, liabilities, taxes, lawsuits, or other hidden problems. You’re starting fresh and only purchasing the equipment, inventory and other assets of the business and transferring them to your own business or corporation.
In terms of business continuity, in an asset purchase deal, depending on how the transaction is structured, the seller usually terminates all existing employees and is responsible for all employee related termination costs such as severance and vacation pay. The buyer in an asset deal can assume the employees under a new contract should they wish to retain any existing employees. Furthermore, if the franchise has a lease for its location or contracts with suppliers, you’ll need to renegotiate or transfer these. Landlords and suppliers might require their own approval, which can take time. If the franchise is a sublessee under the franchisor this process will be simpler as the head lease will be between the franchisor and the landlord. In this scenario, the franchisor will require the new franchisee to enter into a new sublease agreement with the franchisor.
Understanding share purchases
In a share purchase, you’re buying the franchisee corporation. This means you take over the entire company—assets, contracts, employees, and liabilities.
Franchisor approval remains important here, too. Even though the corporation stays the same, most franchisors require the franchisor’s permission to transfer ownership. This is because the Franchisor still has disclosure obligations under the Arthur Wishart Act, Ontario or similar franchise disclosure law.
Share purchases offer continuity. Employees, leases, and supplier contracts stay in place. This makes for a smoother transition since you won’t have to rehire staff or renegotiate every agreement. However, buyers need to be aware of the length of time served and renumeration of each employee because unless negotiated otherwise, the buyer is assuming all the employee liabilities. The catch is that you’re taking on everything the company owes or has done in the past. If there are unpaid taxes, lawsuits, environmental issues, outstanding employee obligations, or other hidden issues, they become the buyers problem. That’s why thorough research (called “due diligence”) is critical in share deals. The additional due diligence will increase your legal and accounting expenses as your advisors will need to search and review the business thoroughly for any issues.
Tax implications also differ. Sellers often prefer share deals because they can qualify for lower tax rates on the sale. Buyers, however, don’t get the same depreciation benefits as they would in an asset purchase. Sellers may be eligible for the Lifetime Capital Gains Exemption on the sale of shares of a Qualified Small Business Corporation (QSBC) which the seller may claim a significant portion of their capital gains from the sale tax-free, provided certain conditions are met.
Which option is right for you?
To determine the best structure, start by assessing your risk tolerance. If the idea of hidden debts or lawsuits keeps you up at night, an asset purchase might be the safer bet. Next, review the franchise agreement carefully. Some franchisors impose strict rules on ownership changes, regardless of the transaction type.
Consider the seller’s priorities as well. If they’re motivated by tax savings, they may insist on a share deal. Use this as leverage to negotiate a better price or favorable terms. Finally, think about practicality. If preserving existing relationships with employees, landlords, or suppliers is critical, a share purchase could save you time and hassle.
Before committing to a deal, invest time in researching the franchise’s financial health and legal history. For share purchases, this means digging into corporate records to uncover any red flags. Engage with the franchisor early to understand their transfer process—some charge fees or require training for new owners, even in share deals.
Consulting professionals is non-negotiable. A lawyer familiar with Ontario’s franchise laws can help navigate contracts and compliance, while a tax advisor can clarify the financial implications of each structure. For example, asset purchases may offer depreciation benefits, while share deals could affect your long-term tax strategy.
Finally, plan for delays. Asset purchases often take longer due to lease transfers and franchisor approvals, so build flexibility into your timeline.
Final thoughts
Choosing between an asset purchase and a share purchase isn’t just about the sale price—it’s about safeguarding your investment and setting yourself up for success. By weighing risks, costs, and operational needs, you can make an informed decision that aligns with your goals as a franchisee.
Take your time, ask questions, and lean on experts for guidance. Whether you’re entering the franchise world for the first time or expanding your portfolio, understanding these structures will empower you to negotiate confidently and protect your interests.
Always consult a lawyer and accountant familiar with Ontario franchise law before finalizing any transaction. This article is for informational purposes only and does not constitute legal advice.
