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Old 9th Feb 2010, 22:04   #1 (permalink)
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Taking over a business..do I have to keep current employees???


Am looking for some advice for a friend.

He is thinking of taking over a franchise (restaurant) for the next 3 years. The franchise is for 3 year periods and the current operator does not want to continue.

My friend is concerned that he heard that under some employment legislation - he will have to keep on the current employees. Also..the employees must keep their conditions, rates of pay, hrs etc. His main concern is that if they don't work out or business gets slack.... and he has to lay off some staff...they will be entitled to Redundany based on the time he didn't even employ them. So if after 1 year he makes an employee redundant - they would be entitled to the 4 (1 with friend + 3 with old franchisee) years terms of service x no of weeks redundancy.

Seems a bit unfair??? Also...what of he does not want to employ this current bunch???? What are his options?????

Is there some protection for employees on these 'transfer of business' etc???
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Old 9th Feb 2010, 22:10   #2 (permalink)
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In the UK...

Transfers of Undertakings (TUPE) - BERR
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Old 9th Feb 2010, 22:13   #3 (permalink)
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Thanks Sprogget....
....gonna have a good read!!
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Old 9th Feb 2010, 22:33   #4 (permalink)
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Jeez..... that doesn't look good !!!!

A entrapreneur could get badly stung here... the employee is well protected!!! Last man IN picks up all the bills....

Can't see my friend exposing himself to this.... he should start from scratch himself from a clean sheet!!
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Old 9th Feb 2010, 22:35   #5 (permalink)
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(UK Only).

Free Employer Advice Now, Employment Law Service, Advice on Employment Laws, UK Employer Law Advice, Employment Law Advice for Employers

I am sure Sprogget would find a way to fire them all!
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Old 9th Feb 2010, 22:48   #6 (permalink)
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TUPE is certainly the major concern re employees if the deal goes ahead, however something does not quite add up about a 3 year franchise! From what you say your friend has a lot more due diligence to carry out before he worries about TUPE.
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Old 9th Feb 2010, 22:53   #7 (permalink)
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All is okay with the due diligence.....he is happy with the Turnover, Costs etc. The 3 years is set by the Landlord....my friend could get if for longer of he wants - the min is 3 years.

It's the exposure to employee reduncy rights that worries him!!
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Old 9th Feb 2010, 23:00   #8 (permalink)

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Which country?
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Old 9th Feb 2010, 23:15   #9 (permalink)
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I would be looking for an accountant familiar with such matters.

The foundation of a fair transaction is a fair valuation of the assets and liabilities. Accumulated employee rights are part of the liabilities and a proper valuation is needed. Mind you, a senior employee can at any moment decide to pursue a better opportunity; so, there needs to be a risk quantification between forced and voluntary departures.
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Old 9th Feb 2010, 23:35   #10 (permalink)
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From bitter experience...taking over a franchise when everything in the accounts appears to be rosy is a risky occupation; why does the present incumbent not wish to continue? Very few people walk away from a profitable business; if they want to spend more time with their family they hire someone to run it and keep drawing the profits.

My mistake was not noticing that the seller's family provided most of the labour for nothing They weren't around when I came visiting, and without them the business was not viable.

Second caution is that franchises usually only make money for the franchisors; there could easily be a raft of stuff in the small print restricting your purchasing, advertising, and forcing you to pay for things you don't want. The PB Franchisee puts in 12 hour days, working effectively for the franchisor and not himself, for an income that, looked at with an accountant's eye, is less than a Tesco shelf-stacker would get.

Third caution is never, ever, pay for goodwill no matter what the business is, the value of which invariably departs with the outgoing owners, if it was ever there at all. Stock at cost-price, evidenced with invoices should be bought, but nothing else. WIP is never worth what its creators or accountants value it at.

I'm probably teaching Granny to suck eggs, preaching to the converted, but your post rang all sorts of alarm bells. To repeat, do not believe the accounts.

I'm still working my arse off having been conned and then ruined in the 1990s by the nicest person you could meet, selling a franchised business doing something that I loved but didn't then understand the economics of. I still shudder at how gullible I was because I really wanted the business and to work for myself, away from aviation (which I do know about) for a change, and was blind to its flaws.

PS I have always understood that if you buy the business but not the company, TUPE can be less of a problem. But I've never tried it on.
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Old 9th Feb 2010, 23:36   #11 (permalink)
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Sikpupi, I say again, it does not add up. In the UK Landlords do not set franchise terms and conditions. Even if the landlord is the franchisor they would normally be looking for a new 10 year franchise agreement. If it is less than 10, why and what detrement would this have for the franchisee.

Something about the scenario, as described, or opportunity does not ring true.

Last edited by BabyBear; 9th Feb 2010 at 23:47.
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Old 10th Feb 2010, 08:09   #12 (permalink)
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...I think we are drifting away from the main point to concentrate on the 'term of the contract'. The reason it is not 10 years straight away..is that that Landlord is afraid that such a term would discourage interest.

Maybe my use of the word 'franchise' is confusing the issue. What this is is a Restaurant in a Shopping Mall that is up for rent. The Landlord is looking for someone to take it over and pay a set fee to the Landlord annually. There are 4-6 employees on the books at the moment and he wants to know if he is stuck with these employees if he takes the Restaurant.

From all the above.... it looks like he is !!
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Old 10th Feb 2010, 08:25   #13 (permalink)
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Whether TUPE is unfair is a point of view. The staff who may well have been instrumental in the success of the business have a reasonable expectation that a new owner won't slash their terms and conditions in pursuit of a profit. A new owner may be discouraged from taking on liabilities from previous ownership.

Of course a businessman has the choice as in this case, of finding a bankrupt restaurant and starting anew and hiring staff from a standing start. The scenario described lets the same businessman turn up on Monday morning and start trading with no set up hassle, which in the restaurant trade is considerable. Fwiw, there is no shortage of dead restaurants, it's one of the riskiest sectors in business, with fully 30% failing within one year of commencing trading. Personally, I would avoid as a business.

On the issue of franchising generally, I have a friend of a friend who owns two Subway franchises locally. Curious, I looked into the performance of this particular brand & what I saw is that the main beneficiary is Subway UK. From everything that I see, the franchisee can at best make a living out of it, whilst shouldering hefty liabilities and risk for their trouble.
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Old 10th Feb 2010, 11:05   #14 (permalink)
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The best advice I have is for your friend to have a chat with a solicitor specializing in business law. Obligations to current employees could be but one liability in taking over an existing business. With respect to current employees, the way the transaction is structured could make a difference in whether TUPE applies. It appears that a pure sale of assets does not trigger employee protection, so that may be one way around the issue.
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Old 10th Feb 2010, 11:38   #15 (permalink)
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TUPE is there specifically to protect employees from losing their employment and/or redundancy payments when a business is taken over. Too many people were being sh@t on by unscrupulous employers making a quick change of ownership to avoid their responsibilities.
The usual procedure in a legitimate takeover is to make an allowance in the purchase price for the cost of redundancy pay and pension commitment if any. If the seller won't include this then walk away.
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Old 10th Feb 2010, 15:52   #16 (permalink)
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The key issue is whether you are acquiring the legal entity that employs the persons or just buying the assets of another entity that will be wound up by the vendor after the sale of its assets.

In short, if you are buying the legal entity, then you are buying all of its assets and liabilities, including employees.

You'll need to check with a UK solicitor/accoutant as I'm no longer UK-current, but many jurisdictions, including Canada, brought in legislation where, even if you didn't buy the legal entity, you may still be liable for former emplyees if there was a 'substantial transfer of the business'.

There is a lot of good advice already given. Former accounting profits are frequently overstated (due to the owners' own sweat equity) or understated (eg tax avoidance). Be sure of the true value of all assets you are buying and make your own 'due diligence' into any possible liabilities not reported. Be careful.

Best of luck though!
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Old 10th Feb 2010, 17:03   #17 (permalink)
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Sikpupi, indeed the word franchise was confusing the issue.

Regarding TUPE, too many fear it, it is not, as many consider it, a set of rules that prevent you making sensible changes to improve the business. TUPE is not for the purpose of preventing good commercial decisions being taken.

I know of a restuarant in my village that sold last year and the owner very quickly cut hours of many staff, as it was clear they were not required to work so many hours. It was a sound business decision and properly and legally taken.

I myself made 2 staff redundant, including a long serving manager who was on maternity leave at the time, after buying a business under TUPE rules. Again it was demonstrated that it was the right thing to do for the survival of the business. Much care needs to be taken as it is likely staff will do all they can to get as much as possible from you. Indeed the above mentioned manager gave me quite some grief with all sorts of threats of tribunal etc. However these were empty threats in an attempt to get more money and as there was no case to answer nothing came of it.

If these examples are not convincing enough for you consider the announcement Kraft has made about the Bristol Cadbury factory.

TUPE is much misunderstood.

Legal advice is essential before taking any action and costs of changes clearly require to be factored in to the business plan.
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Old 10th Feb 2010, 17:07   #18 (permalink)
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Ask Kraft - they'll tell you "No,you don't"!
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Old 10th Feb 2010, 17:17   #19 (permalink)
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Spot of thread drift but:
1. Form two limited companies.
2. Place all assets in A
3. Assign all risk inc employees to B
4. B rents assets from A
If it all turns pearshaped place B in receivership (or Creditors Voluntary Arrangement)

Worked OK for EAAC
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Old 10th Feb 2010, 17:28   #20 (permalink)
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Entitlement to reduancy payments? the buggas be wanting shoes next.
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