Buying a franchise: Managing staff when taking over

When you buy an existing franchise outlet, you join a franchise network with customers, established routines and potentially an experienced team already in place. But employees are not simply part of your operational plan. They may come with legal and financial obligations that are not clearly reflected in either the purchase price or the franchise agreement. Employment matters should therefore be a separate part of your pre-purchase due diligence.

1. Clarify what you are buying and who the employer is

Start by establishing the structure of the transaction. If you buy the shares in the company operating the outlet, that company generally remains the employer. Employees’ contracts and the company’s existing obligations therefore remain with the company. A change of ownership does not in itself constitute a transfer of an undertaking under the Danish Transfer of Undertakings Act.

If, instead, you buy the business activities and assets, such as equipment, the customer base and the ongoing operation, the Act may apply. The key question is whether an economic entity is being transferred that retains its identity. This is assessed case by case and depends, among other things, on the nature of the business, its employees and the assets included in the transfer.

You cannot therefore reliably avoid the rules simply by calling the transaction an equipment purchase. Equally, continued use of the same franchise name does not, on its own, mean that the Act applies.

Denmark has no dedicated franchise law, no specific statutory franchise disclosure package and no franchise-specific registration scheme. Franchise agreements are governed, among other things, by the Danish Contracts Act and general principles of contract law. When employees transfer, however, the Danish Transfer of Undertakings Act and wider employment law are central. Freedom of contract between buyer and seller cannot be used to override employees’ mandatory rights.

Ask your adviser to establish:

• Which company is currently the employer?
• Which legal entity will be the employer after the purchase?
• Which employees are assigned to the business activity you are taking over?
• Do any employees work across several outlets or companies?

2. Examine employment terms, not just the payroll

If the Danish Transfer of Undertakings Act applies, the buyer generally takes over the rights and obligations arising from employees’ employment relationships that exist at the time of the transfer. You should therefore look beyond the latest monthly payroll costs.

Request a comprehensive employee schedule covering length of service, working hours, pay, pension contributions, allowances, bonus schemes, holiday entitlements and notice periods. Also obtain employment contracts, relevant amendments, the staff handbook and details of any collective agreements and local agreements.

In particular, check whether actual practice matches the paperwork. An established arrangement for extra pay, particular shifts or paid time off may need closer examination, even if it does not appear in the standard contract. Also look for unresolved overtime claims, unpaid pension contributions and disputes over working hours.

Collective bargaining arrangements require separate attention. Specific rules and deadlines govern how the buyer must deal with collective agreement coverage. Have these assessed before completion rather than assuming you are free to choose new terms.

Employee information must also be shared in accordance with data protection rules. Start with anonymised or aggregated information where that is sufficient, and restrict access to information that identifies individuals. Due diligence does not give you unrestricted access to, for example, detailed health information.

3. Factor the obligations into the price and cash flow

An outlet may have a manageable wage-to-revenue ratio yet still carry significant employment liabilities. Ask your accountant to set out both normal payroll costs and the amounts that could affect your finances on completion.

Divide the review into three categories:

• Ongoing operations: pay, pension contributions, allowances, insurance and other employer costs.
• Accrued liabilities: for example, holiday entitlement, time off in lieu and bonuses where the conditions for payment have been met.
• Potential claims: for example, disputes over overtime, pay adjustments or previous dismissals.

Then agree how these amounts will be treated in the purchase agreement and completion accounts. Consider specific warranties from the seller that information is complete and payments have been made correctly, together with an agreement on who will bear the financial cost of clearly defined claims.

This allocation between you and the seller does not necessarily alter employees’ ability to bring claims against you. Instead, it may give you a claim against the seller. Your adviser should therefore also assess whether the seller would actually be able to pay if a warranty claim arose later.

Also budget for training staff in your working procedures and any additional staffing needed around completion. Keeping the team together can be crucial to ensuring customers experience a smooth transition.

4. Plan communication and changes before completion

The Danish Transfer of Undertakings Act requires employee representatives or the affected employees to be informed in good time. The information must cover matters including the timing, reasons, consequences and any planned measures. If measures affecting employees are being considered, there may also be a duty to consult.

Agree with the seller who will do what, and when. A confidentiality agreement covering the transaction does not remove statutory duties to inform employees.

The transfer itself is not a valid reason for dismissal. Economic, technical or organisational reasons involving changes in the workforce may, depending on the circumstances, justify dismissals, but require a case-specific assessment. Material changes to employment terms may also require notice. Do not therefore turn the franchisor’s wishes for new opening hours or staffing arrangements into commitments before the implications have been examined.

Practical conclusion: Do not buy an existing franchise outlet on the strength of the payroll figures alone. Clarify the form of the transfer, identify employment obligations and agree a legally compliant transition plan before committing.