Buying an Existing Franchise: Auditing Employment Contracts

Buying an existing franchised outlet often means taking on its team and the employer’s commitments. A seemingly well-controlled payroll can conceal unpaid overtime, promised bonuses or accrued leave. Before setting your price, carry out employment due diligence: belonging to a franchise network does not transfer your responsibilities as an employer to the franchisor.

1. Identify exactly what you are acquiring

Start by distinguishing between two types of transaction. In a share purchase, the company employing the staff remains the same: its employment contracts and obligations continue. You acquire a company with its history, including the financial consequences of any past failures to meet its obligations.

In a purchase of business assets as a going concern (fonds de commerce), the employer changes. Article L. 1224-1 of the French Labour Code provides for existing employment contracts to continue where its conditions apply. Case law covers, in particular, the transfer of an autonomous economic entity that retains its identity and whose activity is continued or resumed. Buying an operating outlet may fall within this framework.

Do not therefore assume that you will be able to choose which employees to retain or require them to sign new, less favourable contracts. Ask a lawyer to confirm the scope of the transfer, particularly if some employees work across several of the seller’s establishments.

Request a table showing, for each position, the legal employer, assigned establishment, role, contract type, working hours and length of service. This initial cross-check helps establish whether the team presented actually corresponds to the business being acquired.

2. Gather the documents without unnecessarily exposing employees’ personal data

Due diligence should not stop at a single “staff costs” line in the accounts. With your adviser, request, in particular:

• employment contracts and amendments;
• payslips covering a representative period and remuneration summaries;
• time records, staff rotas, and leave and rest-time balances;
• rules governing bonuses, commissions and benefits in kind;
• the applicable sector-wide collective agreement and other collective agreements;
• documents relating to employment disputes, claims and inspections by employment or social security authorities;
• the mandatory workplace risk assessment document (document unique d’évaluation des risques professionnels) and relevant information on health and safety prevention obligations.

Also check less obvious commitments: a regularly paid bonus, a benefit established through custom and practice, or a written promise may have consequences after the acquisition. The absence of a provision in an individual contract does not, by itself, rule out an obligation.

Arrange proportionate, secure access to personal data. GDPR principles require, among other things, that information be limited to what is needed for the analysis. Prioritise anonymised or aggregated data at the outset, followed by restricted access to the necessary documents. Medical diagnoses have no place in the acquisition file.

3. Calculate the cost of the team after the sale

Ask your accountant to distinguish between the costs recorded in the accounts and those required to operate the business in future. A satisfactory profit may depend on a selling owner who works long hours for relatively little pay, or on family members whose replacements would cost more.

Map out a typical working week: opening, closing, receiving deliveries, cleaning, administration and busy periods. Compare the hours required with the contractual hours available, allowing for leave and usual absences. The aim is not automatically to reduce headcount, but to establish whether the staffing arrangements are viable.

Then examine discrepancies that could create liabilities: unpaid overtime, incorrect job grading under the applicable collective agreement, miscalculated variable pay or questionable use of short-term contracts. A seller’s assurance is no substitute for supporting evidence.

Within a franchise network, the brand’s operational requirements can also affect staffing needs: opening hours, the presence of a trained manager or compulsory training. Translate these requirements into working hours and costs, without assuming that the franchisor will cover them.

4. Reflect the findings in the acquisition agreement

Every significant issue should lead to a documented response: putting matters right before the sale, adjusting the price, obtaining a commitment from the seller or securing appropriate contractual protection. For a share purchase, consider in particular an asset and liability warranty (garantie d’actif et de passif) covering the employment-related risks identified, with precise compensation arrangements.

For a purchase of a fonds de commerce, ask your lawyer to analyse Article L. 1224-2 of the French Labour Code, which concerns the new employer’s obligations and its relationship with the former employer. A contractual allocation of liabilities between buyer and seller does not override employees’ rights.

This due diligence is separate from the franchisor’s pre-contractual disclosure obligations. In France, Article L. 330-3 of the Commercial Code, introduced by the Doubin Law, requires, where its conditions apply, that the pre-contractual disclosure document (DIP) and draft agreement be provided at least twenty days before signing or making any required advance payment. Article R. 330-1 specifies the information required. The DIP is no substitute for employment due diligence on the outlet.

Key takeaway: before committing, insist on a quantified statement of obligations towards the team, a realistic staffing budget and a contractual response to every significant risk.