Franchising in Canada: plan ahead for resale conditions

Buying a franchise means joining a network with a long-term business plan. Yet your exit arrangements deserve attention from the outset. A profitable business is not necessarily easy to sell: the agreement may restrict your choice of buyer, impose fees and leave some of your obligations in place after the sale. Here is how to assess these conditions before you commit.

1. Establish what the franchisor considers a transfer

Do not look only for a clause headed ‘resale’. Relevant provisions may appear under ‘assignment’, ‘transfer’, ‘change of control’ or ‘approval’. Ask your lawyer to review them together, including any provisions in the schedules.

The agreement may cover more than the outright sale of the business. Bringing in a partner, selling shares, restructuring family ownership or transferring the business to a holding company may also require approval.

Clarify which transactions require the franchisor’s consent. A restructuring that does not change the operator may be treated differently from a sale to a third party, but do not assume it is automatically permitted.

Also consider unexpected events: death, incapacity or the departure of a managing partner. Does the agreement allow enough time to find a suitable operator? Does it permit temporary management arrangements? These questions are particularly important if your family is relying on the value of the business.

Prepare a summary showing the approval required, supporting documents, timescales and potential costs for each scenario.

2. Check the buyer approval process

The franchisor will generally want to check that the buyer has the resources and skills needed to join the network. The issue is therefore not simply whether approval is required, but how clearly its conditions are defined.

In particular, ask:

• What financial and professional criteria must the candidate meet?
• Is specific experience or daily attendance required?
• Who must complete training, and when?
• How long does the franchisor have to respond to a complete application?
• Must reasons for a refusal be given in writing?

Identify conditions that depend on you, such as having no outstanding breaches of the agreement, paying all sums due or completing required works. A vague obligation to ‘bring the premises up to standard’ can create considerable uncertainty when negotiating the price.

Also check for a right of first refusal. Depending on the contractual mechanism, this may allow the franchisor to buy on the terms of an offer you have received. Ask your lawyer to explain what triggers the right, the response deadline and what happens if the offer changes. A prospective buyer will want to understand these steps before investing time in an application.

3. Calculate the net proceeds and remaining obligations

The advertised sale price is not the amount you will keep. Ask your accountant to prepare an estimate of the financial outcome of a sale, separate from your start-up budget.

List transfer fees, buyer training costs, professional fees and any required works. Add debt repayments and the tax implications of the proposed structure: an asset sale or a share sale. Ask who bears each expense and when it becomes payable, including if the transaction falls through.

Another point directly affects the value: will the buyer take over your agreement, or have to sign the agreement the franchisor is offering at that time? New royalties or obligations may change the buyer’s projected profitability and, consequently, their offer. Also check how long they will actually be entitled to operate the franchise.

Finally, selling does not necessarily release you from your obligations. Ask which obligations will remain, such as confidentiality, non-compete restrictions, indemnities or liability for earlier breaches. Any release of the seller and anyone who has guaranteed the seller’s obligations should be clearly documented, rather than inferred solely from consent to the sale.

4. Understand the applicable provincial law

Canada has no general federal franchise law. Specific franchise rules are set at provincial level, and the agreement is not your only source of protection.

In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 imposes, among other things, a duty of fair dealing in the performance of the agreement, including good faith and observance of reasonable commercial standards. It also protects franchisees’ right of association. These protections do not, however, create an automatic right to sell to any candidate.

Ontario law generally requires disclosure at least 14 days before the relevant signing or payment, subject to applicable exceptions. On a resale, an exemption may be available in certain circumstances: do not assume that a transaction between franchisees is always exempt from disclosure. Have your lawyer check the franchisor’s role and the legal conditions for the exemption.

In Quebec, there is no specific franchise legislation imposing the same disclosure-document regime. The Civil Code of Québec, including its good-faith rules and contractual principles, applies. Elsewhere, have the legislation in force in the relevant province checked before proceeding with any transaction.

Key takeaway: before buying, insist on a clear resale process covering approval criteria, timescales, fees and releases from liability. Have any uncertainties checked and ensure that every agreed change is recorded in a written contractual document.