Buying an Existing Franchise Resale in Ontario: Your Legal Rights

Buying a franchise from a current franchisee feels different from buying from the franchisor. You are dealing with another owner, but the franchisor usually still has a say in who takes over the business.

Ontario's Arthur Wishart Act (Franchise Disclosure), 2000 protects franchisees, but whether its disclosure rules apply to a resale depends on how the sale is set up. This article explains the main rules, your rights if something goes wrong, and what to check before you commit.

Does the disclosure duty apply to a resale?

In a new franchise sale, the franchisor must give you a disclosure document at least 14 days before the earlier of you signing any agreement relating to the franchise or paying any consideration to the franchisor. A resale by an existing franchisee is treated differently.

The disclosure duty does not apply when a franchisee resells a franchise if all of the following are true:

• The selling franchisee is not the franchisor, its associate, or a director, officer or employee of either.
• The sale is for the franchisee's own account.
• For a master franchise, the entire franchise is being sold.
• The sale is not effected by or through the franchisor.

The last point matters most. If the franchisor takes part in arranging or completing the sale, the exemption may not be available, and you may be entitled to disclosure. Whether that is the case depends on the facts, so ask a lawyer to look at how your deal is structured.

Other situations where disclosure is not required

A few other exceptions can look like a resale, so it helps to know them. Disclosure is not required in these cases:

• An additional franchise granted to an existing franchisee, if it is substantially the same as the one already operated and there has been no material change.
• A renewal or extension with no interruption in operation and no material change.
• A sale by an executor, administrator, sheriff, receiver, trustee, trustee in bankruptcy or guardian on behalf of someone other than the franchisor.
• A grant to a person who has been an officer or director of the franchisor or its associate for at least six months, or a former one if not more than four months have passed.

The regulation also sets exemptions based on size, including a fractional franchise at 20 per cent of first-year sales, a total initial investment of no more than $15,000, and one greater than $3,000,000. Check the current version of the regulation with a lawyer, because exemptions can change.

What disclosure must look like when it is required

When disclosure applies, the document must be delivered as one document at one time. If a material change happens, the franchisor must give a written statement of it as soon as practicable after the change and before you sign or pay.

Ontario's guidance says the document must include information about the franchisor, such as business background, litigation history, bankruptcy or insolvency information and financial statements. It must also include offer information, such as costs, copies of the proposed agreements, any exclusive territory, supplier restrictions, volume rebate policy, termination, renewal and transfer conditions, training, advertising funds, and a list of current and former franchisees.

Even when the law does not require disclosure on a resale, you can still ask the seller for these items. They show what you would be taking on.

Your rights if disclosure was required and went wrong

A notice of rescission must be in writing. It must be delivered to the franchisor personally, by registered mail, by fax, or by another prescribed method.

After rescission, the franchisor or its associate must, within 60 days of the effective date, refund money received (other than money for inventory, supplies or equipment), buy back remaining inventory, supplies and equipment at the purchase price, and compensate you for certain losses.

A damages claim can be made against the franchisor, its agent, its broker, its associate, and every person who signed the disclosure document. A person is not liable for a misrepresentation if they prove you acquired the franchise knowing of it. Any purported waiver or release of your rights under the Act is void.

Franchisor approval and transfer fees

Whether the franchisor must approve you, what conditions it can set, and whether it can charge a transfer fee are questions the franchise agreement mainly answers. The agreement may set approval steps, training requirements or fees, so read the transfer provisions closely before you sign anything.

Every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement, including acting in good faith and in accordance with reasonable commercial standards. Whether a particular refusal or fee breaches that duty depends on the facts and the wording, and a lawyer can assess it.

Make approval a condition of your purchase, so that you are not committed to the seller if the franchisor says no.

What to do next

• Get the franchise agreement and ask whether the franchisor is involved in the sale.
• Ask the seller and franchisor for the information Ontario expects in a disclosure document, including costs, territory, supplier rules and transfer conditions.
• Check the transfer, approval and fee terms in the franchise agreement.
• Ask for the list of current and former franchisees and speak to some of them.
• Have a lawyer review the purchase agreement before you sign or pay any money.
• If something has gone wrong, write down the dates, because the cancellation deadlines are short.

Frequently asked questions