Buying a Franchise in South Africa: Existing Staff Checks

Buying an operating franchise can give you an experienced team from day one. It can also bring employment obligations that are not obvious from the asking price. Before joining South Africa’s franchise community through an existing outlet, establish who employs its staff, how the purchase affects them and which employment costs you may inherit. Franchisor approval is not a substitute for this investigation.

1. Establish what is being bought and who employs the team

Start by distinguishing a purchase of shares in the outlet’s operating company from a purchase of the business or its assets. In a share purchase, the employing company ordinarily remains the same: its employment obligations do not disappear because its shareholders change.

For a business purchase, section 197 of the Labour Relations Act 66 of 1995 is central. Where a business transfers as a going concern, the new employer generally replaces the old employer in existing employment contracts automatically. Employees’ continuity of service is preserved, and employment rights and obligations transfer subject to the Act’s provisions.

Not every asset purchase is a going-concern transfer. Equally, calling a transaction an “asset sale” does not settle the question. Ask a South African labour-law adviser to assess the substance of the proposed arrangement before you sign.

Confirm the legal employer using employment contracts, payroll records and company details. Do not assume that people wearing the brand’s uniform are employed by the franchisor. Also identify agency workers, contractors and anyone shared with another outlet: their arrangements may need separate assessment.

2. Build an employee liability schedule

Request a staffing schedule early enough for your accountant and lawyer to review it alongside the purchase price. Handle employee information securely, with appropriate safeguards under the Protection of Personal Information Act 4 of 2013, rather than circulating personnel files unnecessarily.

The review should cover:

• Each employee’s role, start date, employment status and contractual hours.
• Salary or wages, regular allowances, commission and bonus arrangements.
• Accrued leave, overtime owed and other outstanding payments.
• Pension or provident fund contributions and other employee benefits.
• Applicable collective agreements or bargaining council requirements.
• Pending grievances, disciplinary proceedings and employment disputes.
• Payroll deductions and evidence that required payments have been made.

Reconcile the schedule with payroll reports and supporting records. A seller’s summary may miss informal arrangements, long-standing benefits or amounts that have been deducted but not paid over.

Section 197 includes requirements for the old and new employers to agree valuations and allocate responsibility for specified employee-related amounts, including accrued leave pay and potential severance liabilities. Your adviser should explain these requirements and any continuing exposure after transfer. A private allocation between buyer and seller does not simply remove employees’ statutory rights.

Translate the findings into the sale terms. Depending on the risks, your advisers may recommend a price adjustment, a retention of part of the purchase price, warranties or indemnities. These are negotiated protections, not automatic guarantees of recovery.

3. Test whether the staffing model is sustainable

An outlet’s historic wage bill is not necessarily the cost of running it properly after takeover. Compare actual rotas with opening hours, customer demand and the brand’s required service standards.

Ask who currently fills gaps. If the seller works unpaid management shifts or regularly borrows staff from another business, the reported payroll may understate your future requirements. Check whether a manager’s departure would leave the outlet without essential skills or supervision.

Build a realistic staffing budget that includes paid leave cover, overtime where lawful, benefits, recruitment and any necessary training. Check compliance with applicable minimum wage requirements, the Basic Conditions of Employment Act 75 of 1997 and relevant collective agreements.

Do not base the purchase on an assumption that you can dismiss existing staff and recruit cheaper replacements. Transfers and transfer-related dismissals carry specific legal protections. Any proposed restructuring needs specialist advice rather than a promise from the seller that employees will “start afresh”.

4. Align employment checks with the franchise paperwork

South Africa specifically regulates franchise agreements through the Consumer Protection Act 68 of 2008 (CPA) and its Regulations. The prescribed disclosure document must be supplied at least 14 days before signing the franchise agreement. Section 7 also requires the agreement to be written and in plain, understandable language.

That franchise disclosure process does not replace employment due diligence on the outlet you are buying. Review the business sale agreement, franchise agreement and staff-transfer arrangements together. Confirm who handles employee communications, payroll handover and unresolved liabilities, and make sure the intended takeover date works across the documents.

Practical takeaway: Before committing, obtain a verified staffing schedule, a labour-law assessment of the transaction and a fully costed post-takeover rota. Buy the operating business with its employment obligations understood, not merely its brand and equipment.