Buying an existing franchise: liability for historic debts

Buying an existing outlet allows you to join a franchise network with premises already in operation and a sales track record. However, that does not mean its financial past remains solely the seller’s concern. Liability for earlier obligations depends, among other things, on how the transaction is structured. Before agreeing a price and paying a deposit, check exactly what you are buying and whether creditors could also pursue you for payment.

1. Establish whether you are buying assets, a business or shares

The term ‘franchise sale’ does not precisely describe what is being sold. It could mean buying individual items of equipment and stock, an entire business, an organised part of a business, or shares in the company operating the outlet. These options have different legal and tax consequences.

In a share purchase, the same company continues to operate the business. Its debts do not disappear when its shareholders change. As a rule, buying shares does not in itself make the buyer personally liable to the company’s creditors, but outstanding debts can reduce the investment’s value and require additional funding. Taking a seat on the company’s management board calls for a separate risk assessment.

When a business is purchased, its operations pass to another entity, and the law may make that entity liable for earlier obligations. Simply calling the agreement an ‘equipment sale’ does not settle the matter if what is actually being transferred is an organised collection of assets and rights used to run a business.

Ask a lawyer to determine the legal nature of the transaction based on its substance. Prepare a list covering the assets, contracts, receivables, liabilities and rights needed to operate the outlet. The franchisor’s approval of a new franchisee is no substitute for this analysis and does not confirm that the outlet is debt-free.

2. Check statutory liability for debts

Poland has no separate statute comprehensively governing franchise agreements, no statutory register of such agreements and no specific disclosure document required for every franchise offer. A franchise agreement is an ‘unnamed contract’ under Polish law, meaning it is not a separately defined statutory contract type. It is based primarily on the Civil Code and the principle of freedom of contract in Article 353¹. General rules on business transfers and tax legislation also apply when buying an existing business.

Article 55⁴ of the Civil Code is particularly important. The buyer of a business is jointly and severally liable with the seller for obligations connected with running it, unless the buyer was unaware of them at the time of purchase despite exercising due care. Liability is capped at the value of the acquired business, assessed according to its condition at the time of purchase and prices at the time the creditor is paid.

A clause stating that ‘the seller will pay all historic debts’ does not, by itself, remove a creditor’s rights. Excluding or limiting this statutory liability requires the creditor’s consent. An agreement between buyer and seller can, however, provide a basis for settling costs between them later.

Exercising due care means more than obtaining a declaration that there are no debts. What is required depends on the circumstances. Keep records of your questions, the answers, the statements received and how any discrepancies were resolved.

3. Investigate trade debts, tax arrears and other statutory liabilities

Start by checking amounts owed to the franchisor, suppliers, landlord and equipment finance providers. Ask for a schedule of balances and payment due dates, details of disputes and balance confirmations from the main creditors. Distinguish between amounts already due and costs incurred but not yet invoiced.

In particular, check:

• unpaid franchise fees and adjustments to earlier settlements;
• overdue invoices, interest and agreed repayment schedules;
• disputed claims and payment demands received;
• security interests over the assets being sold;
• liabilities that do not appear in a basic invoice schedule.

Treat tax as a separate issue. Article 112 of Poland’s Tax Ordinance Act governs the liability of a buyer of a business, or an organised part of one, for the seller’s business-related tax arrears. This should not be confused with civil liability: the conditions and recovery procedures differ.

Arrange to obtain the certificate provided for in Article 306g of the Tax Ordinance Act. It can be requested by the seller, or by the buyer with the seller’s consent. It affects the scope of liability, but the interval between its issue and the purchase must also be taken into account. The statutory 30-day period is relevant to arrears arising after the certificate is issued. Check the timetable with a tax adviser. Separately investigate social security contribution arrears and obtain the relevant documents from ZUS, Poland’s Social Insurance Institution.

4. Protect the purchase price and completion arrangements

The findings of your due diligence should shape the purchase terms, not simply be filed away. If debts are identified, agree either that they will be repaid before completion or that a specified portion of the price will be paid directly to named creditors. Clear payment instructions and confirmations of payment are essential.

Consider retaining part of the purchase price for an agreed period or obtaining other security for claims against the seller. The agreement should specify who ultimately bears the cost of liabilities discovered later, how claims must be notified and which documents are required. The seller’s assurances alone will offer little protection if they have no money left to reimburse you after the sale.

Update the financial schedules immediately before completion: new debts may arise between the start of due diligence and the takeover of the outlet. Also agree a cut-off date for allocating income and costs, and a method for apportioning invoices covering periods both before and after the purchase.

Practical takeaway: first establish exactly what the transaction covers, then investigate the liabilities, and only then agree the price and safeguards. Buying an existing outlet should never rest solely on a promise that its financial past will remain the seller’s responsibility.