Acquiring a company as a going concern –

What you are actually taking over: space or operations

The difference between the two options is not in the price or the form, but in what the subject matter is. Under Czech legislation, a business establishment (obchodní závod) is an organized set of assets created by an entrepreneur which, by their will, serves to operate their business, and it is presumed that the establishment consists of everything that normally serves its operation (Section 502 of the Civil Code). An establishment is therefore not a list of items, but a functional whole: premises, equipment, inventory, contractual positions, and liabilities. Employees are not part of the assets; they transfer through a different mechanism described below.

Leasing of space, on the other hand, addresses only one thing, namely the right to use a specific area. You usually hire the staff yourself, buy the inventory yourself, and acquire customers yourself. The debts of the previous operator do not transfer to you in this arrangement, as the assumption of debts only occurs with the business establishment as a whole. However, you pay for this clean slate by starting from scratch, and the value of the running business does not belong to you.

The deciding criterion is the answer to one question: do you want to take over an existing yield, or build your own? If it is essential for you that the business has revenues from day one, scheduled shifts, and established suppliers, you are buying the operations, and a lease of space will not give you that. If you only care about the location and will do the rest your own way, a lease of a business establishment (pacht závodu) is an unnecessary risk that you bring into the transaction without any benefit.

There is also a third way that companies often overlook, namely the purchase of a business establishment. A lease (pacht) differs from a purchase in its temporary nature: upon the termination of the lease, the establishment is returned to the lessor along with everything you have built on it. Those who want to retain the value of the operations permanently should buy; those who want to test the operations or bridge a certain period should lease. The difference only becomes apparent at the end, when what you have invested in the operations is settled.

In practice, a lease of a business establishment occurs in three typical situations. The first is a generational or ownership change, where the incoming operator does not yet have the capital to purchase and the owner wants to retain the property. The second is taking over operations from a company in distress; however, even a lease is not a safe way around creditors, as a dissenting creditor can petition the court to declare the lease ineffective against them. The third is a temporary takeover of activities. The broader context is summarized in the book on selling companies.

Employees: the biggest difference that gets forgotten

A lease of a business establishment is considered a transfer of the employer's activities under Czech legislation (Section 2349 of the Civil Code). This single sentence represents the most expensive difference between the two options, as it triggers the entire regime of the transfer of rights and obligations from employment relationships, which cannot be contractually bypassed by simply naming the document differently.

If a transfer of the employer's activities occurs, the rights and obligations from employment relationships transfer in full to the receiving employer (Section 338 of the Labor Code). Rights and obligations from a collective agreement transfer for the duration of its effectiveness, but no longer than until the end of the following calendar year. Regardless of the legal reason for the transfer, the receiving employer is the one who is capable of continuing the activities of the current employer or activities of a similar nature.

It is this last sentence that refutes the widespread notion that employees are never an issue in a lease of space. For cases other than a transfer of activity under another law, the Labor Code sets out five conditions under which employment relationships transfer even where the parties do not speak of any business establishment. Thus, the factual state decides, not the name of the contract. In the case of a lease of a business establishment, on the other hand, these five conditions are not tested, because the qualification flows directly from the Civil Code and the lessee has no room to argue that the conditions were not met.

The practical impact is twofold, and both are cost-related. You take over the wage claims and unused vacation of employees whose employment relationship is ongoing on the date of transfer, including those who are already serving their notice period and will be entitled to severance pay. Vis-à-vis employees whose employment relationship ended earlier, the rights and obligations remain with the current employer.

The transfer itself is not a ground for termination, so the team cannot be downsized just because you have taken it over.

Also, do not overlook the information obligation with a fixed deadline. Both the current and receiving employers must, at least thirty days before the transfer takes effect, inform the trade union organization and the works council and discuss with them the date, reasons, consequences of the transfer, and planned measures; if neither of these bodies operates at the employer, the affected employees are informed directly. The HR dimension of transactions is discussed in more detail in the text on employee due diligence in company sales.

Receivables and debts: what will transfer to you even if you do not know about it

By leasing the business establishment, the lessee becomes the creditor of receivables and the debtor of debts related to the operation of the establishment; however, they only assume those debts of whose existence they knew or at least must have reasonably assumed (Section 2352 of the Civil Code). If the creditor has not consented to the assumption of the debt by the lessee, the lessor guarantees its performance.

The wording regarding reasonable assumption is where disputes are born. Overdue supplier invoices, lease payments, or utility underpayments at the premises usually belong to the debts whose existence can be reasonably assumed even without anyone showing them to you. In the case of a penalty from a long-settled dispute or a guarantee for another company's loan, the answer is usually the opposite, but the connection of the debt to the operation of the establishment is always examined first, and only then your knowledge.

Contractual exclusion is not a defense because it is not effective against creditors; instead, documenting what you knew when entering into the contract is. A practice that holds up is an annex with a list of liabilities as of the effective date of the lease, signed by both parties, supplemented by a declaration from the lessor that no other debts related to the operations exist. The same role is played by a handover protocol of the premises with the status of inventory, meters, and cash register; furthermore, the lessee only acquires an unlisted debt if they must have reasonably assumed its existence.

The second layer of defense is a holdback or a deferred portion of the lease payments. You retain a portion of the payments for an agreed period and use it to cover debts that emerge subsequently. Without this tool, you are left only with a claim against the lessor, which may not be enforceable once they have leased the establishment. How to check the operations in advance is shown in the text on due diligence in company acquisitions.

Whether the risk of hidden debts outweighs the benefit of running revenues for a specific business is assessed based on the industry, the age of the premises, and the structure of suppliers — which is why the Czech legal team at ARROWS law firm calculates this on a case-by-case basis, not using a template.

Brand, licenses, and know-how: a trap that invalidated the entire contract

The lessee uses and enjoys the business establishment in the manner and to the extent necessary for its proper operation, and may change the scope of business only if explicitly agreed. However, a special rule applies to intellectual property rights: it is prohibited to transfer to the lessee those industrial or other intellectual property rights where this is excluded by the contract under which the right was granted to the lessor, or if the nature of such right excludes it (Section 2351 of the Civil Code).

How dangerous this is was shown by a dispute over chemical products sold under an established brand. The lessor had an exclusive license to the trademark from its co-owners, but it prohibited granting sublicenses to third parties. Nevertheless, they included the use of the brand in the lease agreement of the business establishment, and the lessee began manufacturing and selling under it.

The Supreme Court concluded that by entering into a lease agreement of a business establishment, which includes a license to industrial property granted to the lessor under the then Commercial Code, the lessee's right to use the subject matter arises only if the licensor has granted consent (judgment of the Supreme Court, file no. 23 Cdo 2495/2022, dated 31 October 2022, available at rozhodnuti.nsoud.cz).

Consent was not given in that case, and the courts deemed the entire lease agreement of the business establishment invalid due to conflict with the law. The lessee thus used both designations unauthorizedly and was ordered to cease using them and to withdraw the products from the market. However, this conclusion is tied to a license negotiated under the former Commercial Code; for licenses concluded under the current regulation, the regime is more lenient and the content of the specific license agreement is decisive.

Before signing, therefore, review what the operations actually stand on. This includes trademarks and licenses to them, software licenses, franchise agreements, certifications, contracts with key suppliers containing a prohibition on changing the operator, and the lease agreement for the premises if the lessor is not the owner. For each item, you need to know whether it permits the transfer, under which regime it was concluded, and under what conditions it can be inferred.

How a lease of a business establishment is set up in practice

The first step is defining the subject matter. It is proven useful to describe the establishment by reference to the operated activity and supplement it with annexes containing an inventory of tangible assets, an overview of contracts, a list of employees, and a list of liabilities. A mere list of items without a link to the activity leads to disputes over whether it was a lease of a business establishment or a lease of items; yet, the transfer of employees and debts depends on this qualification.

Second step is setting the lease payments and their link to performance. For operations with seasonality or uncertain ramp-up, a combination of a fixed component and a share of turnover, supplemented by the right to adjustment in the event of a substantial change in circumstances, is proven effective. Fixed lease payments set according to the lessor's best year are the most common reason for a lease to end prematurely.

The third step is the investment and maintenance regime. You need to determine who pays for routine maintenance, who pays for technical appreciation, and how what you leave behind will be settled. Without this, a dispute over appreciation arises at the end of the lease, which is often more expensive than the entire annual yield of the operations. How deep the investment regime should go depends on the duration of the lease and how much you invest in the operations — which is why the lawyers at ARROWS law firm set it up according to the specific case, not using a template.

The fourth step is the exit, i.e., the end scenario. On the date of termination of the lease, receivables and debts belonging to the establishment transfer back to the lessor, and for a debt to whose assumption the creditor did not consent, the lessee guarantees performance instead. For employees, it is assessed who actually continues the activity; in practice, the team usually transfers back to the lessor along with wage costs. What an amendment to an already concluded contract looks like is discussed in the text on amending a lease agreement.

The fifth step is insurance and liability for operations. From the effective date of the lease, liability for damage caused by the operations is usually borne by the lessee as the actual operator, and your insurance policies must be transferred to the same date. This does not relieve the lessor of liability for their own actions, such as the condition of the building they continue to own.

Mistakes that only become apparent after taking over the operations

The most common mistake is a contract titled as a lease of space, which in reality transfers the entire operations. The qualification is not governed by the title, but by the content, so the transfer of employees and debts occurs regardless of how the document is named. Companies do not simplify anything by doing this; they only deprive themselves of the opportunity to address the consequences. The boundary is recognizable: if the contract lists inventory, equipment, a customer database, or transferred contracts alongside the premises, it is usually a business establishment.

The second mistake is omitting publication in the collection of deeds. If the lessee is registered in a public register, they only acquire the right to the business establishment upon publication of the information that the lease document has been deposited (Section 2350 of the Civil Code). Although the contract exists as a legal basis, the right to the establishment itself does not belong to you until then, which is often a problem during audits, with banks, and in insurance events.

The third mistake is taking over the operations without reviewing the lease agreement for the premises. If the lessor is a tenant themselves, they need the landlord's consent to sublease to a third party, and for a written lease agreement, the consent must also be in writing. Without it, this constitutes a material breach of the tenant's obligations, and the owner can shut down your operations. Therefore, secure the consent in advance, or link the effectiveness of the lease to it via a condition precedent.

The fourth mistake is underestimating the tax and accounting impacts. A lease of a business establishment can have different impacts compared to a lease of space regarding depreciation, value-added tax, and transferred inventory and provisions; the specific outcome depends on who owns the individual assets and how the transaction is structured. Therefore, the difference needs to be calculated together with a tax advisor before signing, as the structure is difficult to change afterwards.

The fifth mistake is taking over the operations without checking which debts are visible in the lessor's accounting and which are not. The list of liabilities is usually generated from their data, so if you do not verify the same items against the suppliers' accounts payable ledger, bank statements, and payment schedules, you also assume what is missing from the overview. This check takes a few days and is usually cheaper than a single dispute over what you should have known.

What to review before you sign

The list below summarizes the points where either the price or a subsequent dispute is most often decided in a lease of a business establishment. Which of these are critical for your transaction depends on the industry, the brand's share of revenues, and how large a team is transferring — which is why the lawyers at ARROWS law firm go through them with the client item by item, not as a template.

● Subject matter of the contract: is the establishment defined by reference to the operated activity, not just a list of items? The transfer of employees and debts depends on this qualification.

● List of liabilities: is there an annex with the status of debts as of the effective date, signed by both parties, and a declaration by the lessor that there are no others?

● Transferring employees: do you know the wage costs of the transferring team, including unused vacation, and is the information and consultation scheduled thirty days in advance?

● License chain: have you verified in writing for each trademark, software license, and certification that it permits the transfer to the lessee?

● Premises and landlord's consent: if the lessor is a tenant themselves, do you have the landlord's written consent, or a condition precedent linked to it?

● Securing additional debts: is a holdback or a deferred portion of the lease payments agreed upon for debts that emerge subsequently?

● Publication in the collection of deeds: is the deposit of the lease document in the collection of deeds prepared, without which a registered lessee does not acquire the right to the establishment?

● End of the lease: does the contract describe the settlement of inventory, investments, customer data, and the fate of employees at the end of the lease?

Final Summary

The article has shown that the choice between leasing space and leasing a business establishment is not a formality, but a decision on whether you are taking over just a location or the entire operations with employees and liabilities. A lease of a business establishment provides an active yield but carries personnel and debt risks. A lease of space is cleaner but will not give you the value of the operations.

For company management, three figures are essential to know before signing. The first is the annual wage costs of the transferring employees, including unused vacation. The second is the volume of liabilities whose existence can be reasonably assumed. The third is the share of revenues attributable to a brand or license where the transfer is not certain.

Delaying does not pay off here any more than elsewhere. The structure is chosen before signing, and after taking over the operations, it can only be changed with difficulty, as the employees have already transferred, suppliers are invoicing the new company, and creditors are coming to you. Transactions that turned out well had the list of liabilities and the verified license chain ready before signing.

The Prague-based legal team at ARROWS law firm will assess whether a lease of space, a lease of a business establishment, or a purchase of a business establishment is more suitable for you, verify the licensing and contractual chain, prepare the contract and annexes, and represent you in negotiations with the counterparty as well as in any potential dispute. The firm also connects clients looking for an investor, buyer, or business partner. Write to us at consultation@arws.cz or review our service company sales and transactional advisory.