Buying a franchise business: check employment liabilities

When buying an established franchise business, experienced staff are often an important part of its value. But the acquisition may also bring accrued holiday pay, working time balances and outstanding pay claims. Operating within a franchise network does not remove an employer’s obligations or automatically transfer them to the franchisor. Employment liabilities should therefore be reviewed as a separate part of your due diligence, before you finalise the purchase price and funding requirements.

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

Start by identifying the employing company. People working at the same premises may include the seller’s employees, agency workers, subcontractors and the business owner. Branded uniforms or a shared staff scheduling system do not establish who is responsible for wages and other employer obligations. Ask for a breakdown of the workforce, contractual partners and day-to-day management responsibilities.

In a share purchase, the employing company remains the same. You buy the company’s shares, but its employment contracts and staff-related obligations continue. Any unresolved liabilities arising before the sale also remain with the company, affecting the value of the business you are buying.

In an asset purchase, you need to assess whether the transaction qualifies as a transfer of an undertaking under Finland’s Employment Contracts Act. What matters is the substance of the arrangement, not the heading on the sale agreement. If it is a transfer of an undertaking, the rights and obligations arising from existing employment relationships generally pass to the new employer in accordance with the law.

As the buyer, you cannot therefore assume that you can select only the employees you want or restart everyone’s employment on new terms. Ask a lawyer specialising in employment law to assess the arrangement before you make a binding offer. This is particularly important if you are buying only part of the seller’s business or if staff work across several locations.

2. Understand Finnish rules and employees’ rights

Finland has no dedicated franchising act, statutory franchise disclosure document or special registration system for franchise agreements. Relevant legislation governing the contractual relationship includes the Contracts Act and the Unfair Business Practices Act. General principles of contract law also apply, including the duty of loyalty and the obligation to avoid providing misleading information.

The Finnish Franchising Association’s code of ethics is a form of self-regulation to which its members commit. It does not replace legislation or create a common statutory framework under which all businesses in a franchise network share employer responsibilities.

The key rules governing employment liabilities are the Employment Contracts Act, Working Time Act and Annual Holidays Act, together with the applicable collective agreement. Establish which collective agreement the business must follow and whether payroll has actually complied with it. The seller’s statement about which agreement it uses is not enough if the basis for applying it remains unclear.

A transfer of an undertaking is not, in itself, grounds for an employer to dismiss staff. Employees, meanwhile, have a special right to terminate their employment in connection with a transfer, subject to statutory conditions. You should therefore not treat a key employee’s continued service as a guaranteed benefit of the acquisition without an appropriate discussion.

You must also establish what information must be given to staff and whether any statutory employee consultation obligations apply. These depend on factors including the structure of the transaction and the size of the business. Agree with the seller who will handle communications and when staff will be told about the change.

3. Review employment records and calculate the true cost

First, request a staff summary showing roles, employment start dates, contract types, agreed working hours and the basis of pay. Personal data must be processed only to the extent necessary and on an appropriate lawful basis. A confidentiality agreement alone does not justify disclosing all personnel records to a prospective buyer.

Your review should cover at least:

• employment contracts, amendments and material verbal agreements;
• the grounds for fixed-term contracts and arrangements for variable working hours;
• basic pay, supplements, performance bonuses and benefits in kind;
• annual leave records, accrued holiday pay liabilities and any holiday bonuses;
• working time records, overtime and working time bank balances;
• payment of pension and insurance contributions, and arrangements for occupational healthcare;
• known pay claims, disputes and occupational health and safety findings.

Cross-check employment contracts, staff rotas and actual payslips. If staff do substantial evening and Sunday work but the corresponding supplements do not appear in their pay, investigate. The same applies where staff regularly work additional hours despite having relatively few contracted hours.

Also assess the seller-owner’s own contribution. If they handle staff management, sickness cover and administration without a market-rate salary cost being recorded, your staffing budget may be considerably higher than the historical cost figures suggest. Record which tasks you will undertake yourself and which will require a paid employee.

Calculate both the liabilities accrued by completion and the payments due during the first few months of operation. Accrued holiday pay and the cost of cover during the holiday season are separate items: both can put pressure on cash flow, even if only one appears in the liabilities calculation.

4. Reflect your findings in the sale agreement and handover plan

Due diligence will not protect you if the findings remain only in a report. Specify in the sale agreement how employment liabilities are reflected in the price, how their amount will be confirmed as at completion, and how any shortcomings discovered later will be dealt with.

Ask the seller for specific warranties, for example on the completeness of the employment information provided and any known outstanding pay claims. If a liability is unclear, negotiate either its resolution before completion or a separate allocation of responsibility. However, an agreement between buyer and seller cannot remove employees’ rights under mandatory law.

Prepare a practical handover checklist too. Confirm that payroll records are available, access to the staff scheduling system is in place, occupational healthcare will continue, and responsibility for the first payroll after completion is clear. Shared franchise systems may help, but the employer remains responsible for ensuring that its obligations are met.

Practical reminder: do not accept staff costs as a single figure in the financial statements. Check the contracts, accrued liabilities and actual staffing needs, then reflect their impact in the purchase price, funding arrangements and sale agreement.