Buying a franchise business: check how staff will transfer

Buying an established franchise business often gives you an experienced team as well as an existing customer base. However, the purchase may also bring employment obligations and payment liabilities that a profit and loss account alone will not reveal. The franchise network’s operating model supports day-to-day business, but the company employing the staff bears the employer’s responsibilities. You therefore need to establish how staff will transfer before finalising the purchase price and your initial budget.

1. Establish first whether the employer will change

In a share purchase, you buy the shares in the company. The company remains the employer, so its employment contracts and staff-related obligations continue despite the change of ownership. Existing staff-related liabilities also remain with the company. As a buyer, you need to establish what the company already owes and which terms it has committed to.

In a business purchase, by contrast, you buy an agreed business operation. If the arrangement qualifies as a transfer of an undertaking under Finland’s Employment Contracts Act, the rights and obligations arising from employment relationships in force at the time of the transfer pass to the new employer. What matters is the substance of the arrangement, not the title of the purchase agreement.

The assessment considers factors such as the continuity of operations, the premises and equipment being transferred, the customer base and the workforce. The weight given to each factor depends on the nature of the business. A change of franchisee or franchise agreement alone does not determine the outcome. The transfer rules may also need to be considered where there is no direct sale between the outgoing and incoming operators.

If the arrangement is unclear, ask a lawyer specialising in employment law for a written assessment. Do not base your financial calculations on the assumption that you can freely choose which employees to take on or give everyone new contracts on less favourable terms.

2. Understand the law and employee protections

Finland has no specific franchising legislation and no statutory pre-contractual disclosure document for franchise sales. Contractual relationships are governed by legislation including the Contracts Act and the Unfair Business Practices Act. The Finnish Franchising Association’s code of ethics is binding on its members, but it does not replace legislation.

The key legislation governing staff transfers is the Employment Contracts Act. Its provisions on transfers of undertakings are linked to EU Directive 2001/23/EC. You should also check the implications of the applicable collective agreement, the Collective Agreements Act, the Working Time Act and the Annual Holidays Act. Any information requirements or other procedural obligations under the Co-operation Act must be assessed separately, taking account of the Act’s scope.

A transfer of an undertaking does not in itself justify dismissing employees. Nor can continuity of employment be circumvented by requiring transferring employees to reapply for their own jobs. If you are planning staffing changes, the grounds and procedures for those changes must be assessed separately from the purchase.

The franchisor’s approval of the incoming franchisee does not settle these issues. The franchisor may provide guidance on the business concept and induction, but a franchise agreement cannot override employees’ mandatory statutory protections. Also confirm which company employs each person working at the outlet: some may, for example, be agency workers.

3. Review staff records and calculate the true cost

Request staff-related due diligence information from the seller through a controlled process. Start with aggregated information where possible and limit the disclosure of personal data to what is necessary. Employment due diligence does not give you a general right to obtain information such as employees’ health records.

At a minimum, check:

• employment contracts, job descriptions and employment start dates
• pay, individual allowances, benefits in kind and bonus arrangements
• the applicable collective agreement and any local agreements
• accrued holiday, accrued holiday pay liabilities and working time bank balances
• overtime, additional hours and any outstanding pay claims
• the grounds for fixed-term and variable-hours contracts
• ongoing employment disputes and staff-related claims.

Compare the contracts with payroll and working time records. A staff list prepared by the seller alone will not tell you whether agreed allowances have actually been paid or working time rules followed. Also investigate benefits agreed verbally or established through custom and practice, as not all relevant terms will necessarily appear in the employment contract.

Work with an accountant to calculate both ongoing staffing costs and liabilities accrued at completion. Distinguish between the amount owed and when payment falls due. Accrued holiday pay liabilities may appear on the balance sheet, but arranging cover during holidays creates additional practical costs.

Also check whether the outlet’s profitability depends on a substantial amount of work by the seller personally. If you will not be working the same shifts yourself, include the cost of replacement labour in your staffing calculations. This is not an employment liability that transfers to you, but it may determine whether the current staffing model is financially viable for you.

4. Agree responsibilities and prepare for the first payroll

Under Finland’s Employment Contracts Act, the transferor and transferee are jointly and severally liable for employee claims that fell due before the transfer of the undertaking. As between the parties, responsibility generally rests with the transferor unless otherwise agreed. However, allocating liability in the purchase agreement does not remove employees’ statutory rights.

Set out clearly in the purchase agreement how staff-related liabilities will be reflected in the price, the cut-off date for calculations and how any shortfalls identified later will be handled. Obtain specific warranties from the seller about the accuracy of the information and agree any liability for compensation. In a share purchase, equivalent due diligence helps protect the buyer against unidentified obligations remaining within the company.

Before the transfer, put payroll, shift planning, occupational health services and the necessary employer insurance arrangements in place. Ensure that payroll information and holiday balances are transferred accurately and securely. Agree who will answer employees’ questions and when they will be told about the change.

For staff, it is important to distinguish the change of ownership from any subsequent operational changes. Explain clearly who their employer will be, who will give them instructions and how day-to-day work will continue. Avoid promising new terms before you have established their cost and legal implications.

Practical reminder: do not sign on the strength of the headcount alone. Identify the employment relationships that will transfer, calculate accrued liabilities and agree how responsibility will be divided with the seller before confirming the purchase price.