Buying a franchise: check the value of stock before taking over

When you buy an existing franchise business, stock can account for a substantial part of the purchase price. But a list of purchase costs does not tell you what the goods are actually worth to you. Within a franchise network, product range requirements, promotions and changes to the franchise concept can affect saleability. Stock should therefore be assessed separately, with clear terms governing its transfer.

Establish what you are buying and who owns it

Start by distinguishing between the right to operate the franchise and the purchase of the existing business’s stock. The franchisor is not necessarily the party selling the stock. It may be the outgoing franchisee, while some goods may belong to a supplier or the franchisor.

Ask for an itemised stock list showing product codes, descriptions, quantities, purchase dates and cost prices. The list should also show where the goods are located. Otherwise, goods held in an external warehouse or in transit may be overlooked or counted twice.

In particular, check:

• Whether the seller has purchased and paid for the goods.
• Whether any retention-of-title clauses or other third-party rights apply.
• Whether goods have been supplied on consignment and therefore do not belong to the seller.
• Whether the list includes goods already paid for or reserved by customers.
• Whether display items, samples and packaging are counted as ordinary saleable stock.

Obtain supporting documents, including invoices and relevant supplier agreements. The seller’s declaration of ownership is important, but should not be relied on alone if the documentation raises doubts.

If you are buying the company rather than individual assets, the stock remains within the company. Its value still needs to be checked, but you and your advisers will need to tailor price adjustments and warranties to the company purchase.

Assess saleability, not just the accounting records

Stock can be correctly recorded in the accounts yet still be impossible to sell at the prices assumed in your acquisition budget. Old collections, damaged packaging and goods with a short remaining shelf life may require discounts or lose their value entirely.

Compare the stock list with sales data for individual products. Look at when each item last sold, how quickly it sells and the actual selling prices after discounts. Ask for explanations for stock that has not moved for a long time. The shop’s total turnover tells you little about the specific goods you are taking over.

Involve the franchisor too. Establish whether all the stock can still be sold under the franchise concept and whether planned changes to the product range will make some of it obsolete. An item may be in perfect physical condition but have limited value if the chain is about to discontinue it.

For example, divide the stock into four categories:

• Current products with evidence of regular sales.
• Slow-moving products that require a cautious valuation.
• Seasonal and discontinued products with uncertain demand.
• Damaged, expired or unsaleable goods that should be excluded or valued separately.

A right to return goods may improve their value. However, check who can exercise that right, what deadlines apply and whether reimbursement is in cash or as credit towards future purchases. Do not accept a valuation based on a return right that will not be available to you.

Agree the price and stocktake before completion

Avoid wording that simply states that stock will be taken over “at cost” without explaining how that cost is calculated. Agree whether cost prices will be calculated after discounts, rebates and credit notes, and how any freight costs will be treated. Ask your accountant to check the VAT treatment of the transfer itself.

The price should be based on an agreed method, not solely on the figure shown in the seller’s stock management system. Establish in advance which goods will be excluded and how slow-moving or damaged stock will be valued. Consider a cap on the total stock payment so that extra purchases just before completion do not unexpectedly increase your funding needs.

Also agree a practical stocktaking procedure:

1. Set the timing and decide who will attend.
2. Record sales, deliveries and returns around the time of the stocktake separately.
3. Note the condition of goods, their remaining shelf life and any discrepancies against the stock list.
4. Sign a jointly agreed stock statement, noting any reservations.
5. Set out how disputes and errors discovered later will be handled.

If the final stock statement cannot be completed until after the takeover, the parties can agree a provisional payment followed by an adjustment. Any retention of part of the purchase price must be agreed in advance; it should not be improvised on the payment date.

Understand the rules and allocate responsibility clearly

Denmark has no specific franchise legislation, no mandatory franchise-specific disclosure regime and no dedicated franchise register. Franchise agreements are governed, among other things, by the Danish Contracts Act and general principles of contract law. General duties of loyalty and disclosure may still be relevant if material facts are withheld or misrepresented.

The Danish Sale of Goods Act is relevant to a separate business-to-business purchase of goods. Businesses can contract out of many of its provisions, so contractual terms on inspection, defects and notification of claims are particularly important in practice. For a transfer of an entire business, your adviser should assess how the rules apply to the specific agreement.

Ensure that the transfer agreement sets out the seller’s responsibility for the stock information provided. Approval from the franchisor is not, in itself, a guarantee of the goods’ value or ownership.

Practical takeaway: Only pay on the basis of a documented stock list, an assessment of saleability and a stocktaking and pricing method agreed in writing. The stock valuation should reflect the goods you will actually receive and be able to sell.