Over the last decade, our firm has represented hundreds of Dunkin’ franchisees who have expanded their networks through the purchase of existing restaurants. The vast majority of these acquisitions are transacted as purchases of tangible (e.g. furniture, fixtures, and equipment) and intangible (e.g. telephone numbers) assets, as opposed to the purchase of the stock or membership interests in the seller’s companies. The popularity of asset purchases is largely attributable to the notion that the buyer is acquiring the assets in a new entity, free from all (or most) of the seller’s liabilities.
Many franchisees, however, are unaware of those few, seller liabilities that can actually attach to their new acquisition entity, or even penetrate its shield to create personal liability for its individual members. This article will explore some of these lesser known pitfalls and provide guidance as to how a buyer can mitigate and protect against any resulting successor liability.
I. Paid Sick Leave
Numerous states have enacted laws allowing employees of certain businesses to earn and accrue paid sick time. While the specifics of these laws differ among states, some statutes allow the employees to carry forward a certain amount of the unused portion of their accrued sick time into the following year. These tranches of accrued sick time can create significant risk for a buyer acquiring a Dunkin’ network. More specifically, those employees of the seller, hired at the time of closing, may be permitted to retain and use the accrued sick time from their prior employment.
Under such circumstances, the buyer may even be required to compensate those employees for any unused portion of that time. Given the foregoing, a buyer acquiring a network of existing Dunkin’ restaurants should, at minimum, request all diligence relating to the seller’s reports and practices relating to paid sick time.
II. Violations of the Fair Labor Standards Act
Courts in certain states throughout the country have determined that a successor-employer may be held financially accountable for its predecessor’s wage-and-hour violations under the Fair Labor Standards Act (FLSA). In the context of a Dunkin’ acquisition, a buyer (and the individuals who own the buying entity) that hires the seller’s employees at the time of closing may be exposed to liability for the seller’s failure to pay those employees minimum wage and overtime in accordance with the governing laws. In light of this trend, a buyer should understand and inquire about potential FLSA and state wage-and-hour violations when acquiring a Dunkin’ network to assess the risk of successor liability stemming from a predecessor’s non-compliant action.
III. Unpaid Sales/Use Tax
State statutes require Dunkin’ franchisees to collect and remit sales tax in connection with most transactions involving the sale of food and beverages at their restaurants. Most, if not all, of these statutes will render the buyer of a Dunkin’ network liable for any of the seller’s unpaid sales taxes. Fortunately, state taxing authorities implement a process through which it can issue the buyer a letter or certificate, absolving the buyer of any such successor tax liability. The requirements for tax clearance are unique to each state; some processes simply require the buyer to mail a request for clearance to the governing agency; others are more comprehensive, requiring the parties to escrow all or part of the network’s purchase price until clearance is issued. Accordingly, it is critical that the buyer of a Dunkin’ network consult with his/her legal and accounting professionals to ensure that all necessary steps are taken to comply with the relevant state’s clearance process.
IV. Steps to Avoid or Mitigate Successor Liability
Each of the concepts discussed above presents a formidable source of entity and personal liability for a franchisee purchasing a network of Dunkin’ restaurants. To protect and/or mitigate against such successor liability – in addition to requesting the appropriate diligence materials – there are certain terms and conditions a buyer can include in the governing purchase agreement. Examples of these provisions include:
- Require that the seller represent and warrant that he/she has complied with all rules, regulations and laws governing the operation of its network;
- Require that the seller entity AND the individual owners of the seller entity provide indemnification for any damages arising from successor liability; and
- Require that a portion of the purchase price be held in escrow for 45–90 days to serve as a fund for reimbursement of any damages arising from a breach of seller’s representations and warranties.
Of course, any decisions regarding a sale or transfer of any of your assets should be done with the guidance of an experienced attorney or advisor.
David S. Paris is a founding partner of Paris Ackerman LLP, a transactional law firm specializing in franchising, licensing and distribution, and commercial real estate.