Buying an Existing Franchise: What You Take On from the Previous Owner

Buying an established franchise outlet can be more appealing than starting from scratch: customers know it, the equipment is in place and there are actual financial results to review. But alongside a working business, you may also inherit old problems. Joining a franchise network this way therefore involves more than agreeing a price with the current operator. You need to know exactly what you are buying and whether you can actually continue trading under the brand.

1. Distinguish between buying shares, a business and individual assets

The term “franchise sale” does not, in itself, tell you what the contract will cover. Before paying a deposit, ask for a written explanation of the transaction’s legal structure. This determines both the scope of your due diligence and where historic liabilities will remain.

When you buy shares in a company, its ownership changes, but the company itself remains the same. It will generally remain the party to the franchise agreement, the employer and the debtor. Its existing debts do not automatically become your personal debts, but they do affect the value of the company you are buying. You therefore need to investigate the whole company, not just the selected outlet.

When you buy a business as a going concern, you are acquiring an organised business undertaking. The Czech Civil Code attaches specific rules to the transfer of rights and debts in such a transaction; it is not simply a list of tables, stock and tills. For debts, relevant factors include whether you knew of their existence or should reasonably have anticipated them. A lawyer must assess the precise scope of what transfers based on the actual structure of the deal.

When you buy individual assets and rights, each item being transferred and any necessary consents must be identified. Paying for the equipment does not, by itself, transfer the franchise agreement or the right to use the brand. Nor does splitting the transfer across several contracts automatically exclude statutory consequences, for example under employment law.

The practical outcome of this stage should be straightforward: a list of what transfers, what stays with the seller and what you need to arrange afresh.

2. Secure the right to continue under the brand before buying

The existing franchisee cannot promise you more rights than they hold themselves. Ask for their franchise agreement, including any amendments, and check whether it allows a transfer, requires the franchisor’s consent or addresses a change in the company’s ownership. Even when buying shares, the agreement may require prior consent to a change of control.

The Czech Republic has no dedicated franchise law or general requirement to register franchise offerings. Franchise agreements are usually entered into as contracts not specifically defined by law under Section 1746(2) of Act No. 89/2012 Coll., the Civil Code. General contract rules, licensing provisions, intellectual property protection and competition rules also apply. The law therefore gives you no automatic right to continue trading under the brand simply because you have bought the outlet.

Obtain written confirmation from the franchisor of, in particular:

• whether you will take over the existing agreement or sign a new one;
• how long you will have the right to operate the outlet;
• whether a transfer fee or a new joining fee will be payable;
• whether there are any outstanding payments or unresolved breaches of the agreement;
• which conditions the new operator must meet before taking over.

The purchase documentation should make completion and the release of funds conditional on obtaining the necessary consents and the related agreements taking effect. It must also state what happens to the deposit if the franchisor does not approve the buyer.

3. Investigate the history that the purchase price does not reveal

An established outlet offers the advantage of real operating data. However, do not rely on a spreadsheet prepared by the seller. Cross-check accounting records against till reports, bank transactions and franchise fee statements. Review several periods so that a one-off promotion or a strong season does not create a misleading picture.

Separate the outlet’s results from the seller’s other activities. Find out whether costs include realistic remuneration for the owner’s work and whether the outlet benefits from arrangements that will end after the transfer. Unpaid help from family members or a temporary supplier discount will not automatically come with the purchase.

Prepare a separate schedule of past liabilities and unresolved issues. These include unpaid invoices, disputes, outstanding customer complaints and claims, customer deposits, employees’ untaken holiday and any potential tax risks. For each item, establish who is legally responsible and how it will be reflected in the price or dealt with in the contract.

Pressure to pay quickly without being able to verify the supporting records is a warning sign. Claims that the franchisor checks everything are no substitute for your own due diligence. The franchisor is primarily concerned with the brand’s interests; the buyer needs to protect their investment.

4. Complete the handover using an agreed procedure

The purchase agreement should contain specific statements by the seller about the condition of the business, the information supplied and its liabilities. A general statement that the outlet is “problem-free” is not enough. Agree on the procedure and remedies if any statement proves untrue. Bear in mind that allocating costs between you and the seller in the contract does not, in itself, change the rights of third parties.

Depending on the risks, consider placing the purchase price in escrow or retaining part of it until clearly defined conditions have been met. The rules for releasing funds must be objective and time-bound, rather than dependent on a vague notion of “buyer satisfaction”.

On the handover date, carry out a stocktake, record the condition of the equipment and allocate sales revenue, stock and ongoing payments using the agreed cut-off point. The handover record should also cover keys, access credentials and documentation. Check that any customer data being transferred can lawfully be handed over and that the new operator actually holds the necessary authorisations.

Practical takeaway: First establish the structure of the purchase, then secure the franchisor’s consent and investigate the business’s history. Release funds only in line with conditions that allow you not just to take over the outlet, but also to continue running the business.