Franchising in Canada: managing the transfer of a franchise

Turning your business into a franchise also means planning for a franchisee’s eventual departure. Whether prompted by retirement, a change in family circumstances or a business sale, a well-managed transfer protects business continuity and trust within your franchise network. Before signing your first agreement, establish how a prospective buyer will be assessed, informed and supported through to completion.

1. Define what constitutes a transfer

The sale of an outlet is not the only transaction to consider. A franchisee may sell the assets of their business, transfer shares in their company or bring in a new business partner who takes control. These transactions have different legal, tax and contractual implications.

Ask your lawyer to specify in the agreement which events require your consent. Also set out how internal reorganisations, family transfers and the owner’s death or incapacity will be handled. A simplified procedure may be appropriate in some circumstances, without dispensing with the necessary checks.

Distinguish between three decisions: approving the transaction, accepting the buyer as a franchisee and determining which agreement will govern the relationship after the sale. Permission to sell should not leave the latter two questions unresolved.

In particular, avoid promising the seller that their buyer will automatically receive the same terms. Whether the existing agreement will continue or a new one must be signed should be clarified before the parties commit themselves.

2. Establish a transparent and proportionate approval process

Your aim is not to set the resale price on the franchisee’s behalf. It is to check that the buyer can operate the outlet in line with your network’s requirements.

Draw up an approval checklist based on verifiable factors:

• the financial resources available after the acquisition;
• the buyer’s management experience and availability;
• successful completion of the training required before taking over;
• the ability to obtain the necessary permits and consents;
• an understanding of the contractual obligations.

Specify the documents to be submitted, who will assess the application and the stages of the decision-making process. Set a realistic processing timeframe, starting when a complete application is received. Document the reasons for any refusal rather than relying on a general reference to ‘discretionary powers’.

Also specify any transfer fees and what they cover. Do not wait until a sale is under way to discover that your agreement makes no provision for assessing or training the candidate. Any charges must comply with the applicable contractual commitments and statutory disclosure obligations.

3. Check your disclosure obligations towards the buyer

In Canada, a resale does not automatically exempt a franchisor from pre-contractual disclosure obligations. The applicable rules depend on the province and the franchisor’s role in the transaction.

For example, Manitoba’s The Franchises Act and its regulation require, subject to applicable exemptions, a disclosure document to be provided at least 14 days before the signing of an agreement or the making of a payment covered by the legislation. Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 also establishes a pre-contractual disclosure regime.

Exemptions may apply to certain transfers carried out by a franchisee on their own account. However, the conditions must be checked: the franchisor’s involvement, the relationships between the parties and the structure of the transaction can affect the assessment. Do not assume either that merely giving consent always triggers a fresh disclosure obligation, or that a sale between franchisees necessarily removes it.

In Quebec, no specific legislation requires a franchise disclosure document of this kind. The Civil Code of Québec, particularly its rules on good faith, consent and contracts, still applies. The absence of a prescribed document does not justify withholding information material to the decision to enter into the agreement.

Have the legal process checked before anything is signed or any payment is made. This review should also cover proposed preliminary agreements and deposits.

4. Organise the transfer without overlooking responsibilities

Prepare a completion checklist shared by the franchisor, seller and buyer. It should assign responsibility for each task and specify the evidence required: landlord’s consent, insurance, permits, training, stock, IT access and authorisation to use the brand.

Explicitly address outstanding amounts, personal guarantees and obligations that continue after the sale. The seller should not assume that a transfer automatically releases them from all their commitments. Also make arrangements for gift cards, outstanding orders and customer data, in compliance with privacy and data protection rules.

Key takeaway: before granting your first franchise, have a transfer clause, an approval checklist and a completion checklist prepared. These three tools will make a future resale more predictable, but they do not replace a legal review tailored to each transaction.