Franchising in Canada: check the resale conditions

Buying a franchise means joining a network, but it also means acquiring a business you may eventually want to sell. Finding a buyer is not always enough: the agreement may require an approval process, fees and several conditions to be met beforehand. Before committing, check whether these requirements allow a realistic exit, even if your outlet is performing well.

1. Establish what the agreement considers a transfer

Start by locating clauses headed ‘assignment’, ‘transfer’, ‘sale’ or ‘change of control’. Their scope may extend beyond selling the entire outlet. Depending on the wording, bringing in a business partner, selling shares or restructuring your company may also require the franchisor’s consent.

Ask your lawyer to distinguish between selling the assets and selling shares in the operating company. These transactions have different legal and tax consequences, and the agreement may treat them differently.

Then draw up a short list of transactions you might consider during your time as an owner: bringing in an investor, selling a stake or selling the whole business. For each, identify:

• the consent required and who grants it;
• the documents to be submitted;
• any fees;
• the conditions to be met before completion.

Do not assume that a transfer between companies you own is automatically permitted. Have the contractual treatment of this situation confirmed before deciding how to structure your acquisition.

2. Examine buyer approval and timescales

The franchisor may want to assess the prospective buyer’s financial resources, experience and ability to run the business. The issue is therefore not simply whether approval is required, but how clear the criteria and process are.

Ask what information is needed for a complete application, who makes the decision and whether there is a deadline for responding. Also check whether the prospective buyer must undergo training or meet criteria that are not set out directly in the agreement.

Broad wording such as ‘in accordance with the franchisor’s criteria’ warrants an explanation. What criteria apply today? Can they change? Does the agreement set limits on the refusal of consent? The absence of a clear deadline can complicate a sale if the buyer’s funding offer expires on a specific date.

Also look for any right of first refusal. This clause may allow the franchisor to buy on the terms of an offer you have received, following the specified procedure. Clarify which documents must be supplied, the deadline for exercising the right and the effect of any subsequent change in price. This mechanism needs to be built into the sale timetable, not discovered after you have accepted an offer.

3. Calculate the true cost of exiting

The sale price is not the amount you will keep. Work with your accountant to estimate the net proceeds, without assuming that every possible fee will apply.

Look in particular for transfer fees, application review fees, professional fees reimbursable to the franchisor and the cost of training the buyer. Check who must pay them and when. Depending on the documents signed, an amount payable when the application is submitted may remain due even if the sale falls through.

Also examine conditions that could delay the transaction or make it more expensive: remedying breaches, replacing equipment or settling disputed amounts. Ask whether the applicable requirements can be established before you start looking for a buyer.

Finally, clarify whether the buyer will take over the existing agreement or have to sign the version the franchisor offers at that time. Different obligations may affect the buyer’s valuation and therefore the price they are willing to pay. A resale does not automatically guarantee a fresh contractual term.

4. Check disclosure requirements and your release from obligations

In Canada, franchise regulation is notably a provincial matter. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to applicable exemptions, a disclosure document to be provided at least 14 days before a franchise-related agreement is signed or a payment is made. Among other things, this document must set out the transfer conditions. Compare that information with the detailed clauses in the agreement.

Some resale transactions may qualify for an exemption from disclosure. Do not assume either that every transfer is exempt or that every transfer automatically requires fresh disclosure: have a lawyer assess the transaction and the franchisor’s involvement.

Quebec has no franchise-specific legislation imposing a comparable general pre-contractual disclosure regime. The Civil Code of Québec governs matters including contracts and good faith. Transfer conditions therefore also require careful scrutiny.

Finally, permission to sell does not necessarily release you from your obligations. Ask which obligations will continue and whether your personal guarantees will end. Arrange for the necessary release documents rather than relying solely on the change of ownership.

Key takeaway: before buying, insist on a clear resale process covering approval criteria, timescales, costs, the buyer’s agreement and what happens to your personal obligations.