Share Purchase Transaction for a Franchise

Buying and selling a franchise is rarely, if ever, a simply task - as there are all too often a multitude of complexities, hurdles and pressures bearing down upon the parties involved.

Contact Neufeld Legal PC for franchising legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

The purchase and sale of a franchise most often is undertaken by way of a share purchase transaction or an asset purchase transaction. A share purchase transaction involves acquiring the shares of the corporation that owns and operates the franchise. This means that the purchaser acquires the entire corporate entity, which includes all its assets, liabilities, contracts, and history—both good and bad.

Advantages of a Share Purchase of a Franchise

• Business Continuity and Simplicity: This is often the biggest advantage for the buyer. Because the legal entity (the corporation) remains the same, existing contracts, leases, permits, licenses, and supplier agreements generally stay in place. This can make the transition much smoother and less disruptive to the business's day-to-day operations. There's no need to renegotiate every single agreement, which can be a time-consuming and complex process in an asset purchase.

• Employee Retention: Since the corporation is the employer, all existing employees remain employed by the company. You don't have to terminate and rehire staff, which can save time, money, and potential severance costs.

• Tax Advantages for the Seller: Sellers often prefer share purchases because they can be more tax-efficient. In many cases, the seller may be able to utilize the Lifetime Capital Gains Exemption (LCGE) to significantly reduce or eliminate the tax on the sale of their shares, provided the business meets certain criteria. While this is a benefit for the seller, it can be a point of negotiation for the buyer, who may be able to secure a lower purchase price because of the seller's tax savings.

• Access to Tax Attributes: In a share purchase, the buyer acquires the corporation's tax history, including any non-capital losses or tax credit carry-forwards. This can provide potential tax benefits for the new owner.

Disadvantages of a Share Purchase of a Franchise

• Assumption of Liabilities (The "Hidden Risk"): This is the most significant disadvantage and a major reason why buyers often prefer an asset purchase. In a share purchase, you inherit all of the company's liabilities—known and unknown. This can include anything from unpaid taxes, outstanding employee obligations, undisclosed lawsuits, or environmental issues. Thorough and extensive due diligence is crucial to uncover these potential risks, but there's always a chance that something is missed.

• No "Step-Up" in Asset Value: When you buy the shares of a company, the tax value (cost base) of the underlying assets for tax purposes (such as for claiming Capital Cost Allowance or depreciation) remains the same as it was for the previous owner. You cannot "step up" the value of the assets to their fair market value on the date of purchase. This means the buyer may not be able to claim as much in tax deductions from depreciation as they could in an asset purchase.

• More Complex Due Diligence: To mitigate the risk of inheriting unknown liabilities, the due diligence process in a share purchase is more comprehensive and often more expensive. It requires a deep dive into the company's financial records, corporate history, legal compliance, and tax filings.

• Franchisor Approval is Still Required: Even though the corporate entity remains the same, most franchise agreements require the franchisor's explicit approval for a change in ownership. The franchisor will still need to vet the new owner, and there may be transfer fees and training requirements to fulfill, just as there would be in an asset purchase.

It is critical to understand that the decision to proceed with a share purchase transaction or an asset purchase transaction is highly complex and depends on a variety of factors, including the specific franchise, the financial health of the business, the priorities of both the buyer and the seller, and their respective risk tolerances. It is absolutely critical to consult with a lawyer and an accountant with experience in franchises and business acquisitions and divestitures before making a decision.

Christopher Neufeld is a business lawyer knowledgeable in the rigors and challenges of the franchise business, together with the legal constructs that are critical to their effective operation. For experienced legal representation in starting, acquiring / selling, operating and managing a franchise, contact franchisee lawyer Christopher Neufeld at 403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

 

Contact us via email at chris@neufeldlegal.com or call 403-400-4092 / 905-616-8864.