Buying a Resale Franchise from an Existing Ontario Franchisee

Buying a location from an existing franchisee can feel safer than starting from scratch. The business has customers, staff and a track record, and the brand is already in place.

But a resale involves three parties: the seller, the franchisor and often a landlord. Each can affect whether the deal closes and on what terms. This article outlines the main issues to check.

The franchisor is part of the deal

Whether and how you can sell a franchise depends on your own franchise agreement and your situation, so it is worth confirming the terms with a lawyer before you plan a sale. Whether the franchisor must approve you, whether it has a right to buy first, and what transfer fee or training it requires are questions to check in the transfer clause of the agreement. Ask the seller for the full franchise agreement and read that clause closely.

Every party to a franchise agreement must act in good faith, and a breach lets the other party sue. Expect the franchisor to look at your finances and experience. Do not sign a binding purchase agreement or pay a deposit without understanding whether approval is a condition of the sale. A lawyer can help you make the purchase conditional on franchisor consent.

Disclosure and your protections

For a new franchise, the franchisor must give the disclosure document at least 14 days before you sign the franchise agreement or any related agreement, or pay any consideration. Disclosure information must be accurate, clear and concise. Whether and how these rules apply to a particular resale, and who must provide disclosure, depends on how the transaction is structured, so ask a lawyer early.

If you will be signing a new franchise agreement with the franchisor, that document matters as much as the seller's price. The government does not review or approve franchisors or their disclosure documents, so your own review counts. Franchise law also expects good faith: every party to a franchise agreement must act in good faith, and a breach lets the other party sue.

Lease assignment

A location is only as valuable as the right to stay in it. Check how much time remains on the lease, whether there are renewal options, and whether the landlord must consent to an assignment. Franchisors often have their own rights over the premises, so also check whether the franchisor must approve the lease transfer. These terms vary by lease, so have a lawyer read it before closing.

Due diligence on the business

• Financial statements, tax filings and sales records for several years.
• Equipment lists, leases and any liens or debts attached to assets.
• Employee list, wages and any outstanding obligations.
• Any disputes, complaints or notices from the franchisor, landlord or customers.
• Franchisor requirements for renovations or upgrades that you may inherit.
• The seller's reason for selling, checked against what other franchisees tell you.

Also confirm what is included in the price: equipment, inventory, goodwill and territory. Whether the purchase is structured as an asset sale or a share sale changes your risks and the tax treatment, so get accounting advice.

What to do next

• Get the franchise agreement, lease and financial records from the seller.
• Ask the franchisor in writing about its approval process and transfer requirements.
• Make your offer conditional on franchisor approval, landlord consent, financing and satisfactory due diligence.
• Confirm what disclosure you are entitled to before you sign or pay anything.
• Have a lawyer and an accountant review the deal before you commit.

Frequently asked questions