- A franchise resale, including a sale of shares in the company that owns the franchise, counts as a grant under the Franchises Act.
- Every franchise agreement carries a duty of fair dealing, including good faith and reasonable commercial standards when approving a transfer.
- Whether the franchisor can condition your sale depends mostly on your franchise agreement, so have it reviewed before you sign a deal with a buyer.
You have a buyer, or you are looking for one, and your franchise agreement says the franchisor has to sign off. It is natural to ask whether the franchisor can simply say no, or attach conditions that make the sale harder.
In British Columbia the answer comes from two places: the terms of your franchise agreement and the Franchises Act. This article explains how they fit together and what to check before you commit to a buyer.
This article covers the law of British Columbia.
Start with your franchise agreement
The franchise agreement is usually where the franchisor's approval rights, transfer fees and conditions for a sale are set out. The Franchises Act does not have a stand-alone section on transfers, so the agreement's wording matters a great deal.
Read the transfer or assignment clause closely. Look for who must approve a buyer, what the franchisor can ask for, and whether the clause gives the franchisor any right to buy the franchise itself or to refuse for particular reasons.
A resale is a grant under the Act
Under the Franchises Act, a grant includes the disposition of the franchise or of an interest in it, including shares in the corporation that owns the franchise. So a franchise resale is a grant, and selling the shares of your franchise company does not take you outside the Act.
That matters because the Act's disclosure rules attach to grants. A prospective franchisee must receive the disclosure document at least 14 days before the earlier of signing a franchise agreement or related agreement, or paying consideration relating to the franchise. A statement of material change must be delivered as soon as practicable after the change, and before signing or paying.
What limits the franchisor
Every franchise agreement imposes a duty of fair dealing on each party. That includes acting in good faith and according to reasonable commercial standards when exercising a right, such as approving a transfer. A franchisor cannot treat its approval right as a free pass to act arbitrarily.
There is also a disclosure exemption for resales. A franchisee granting a franchise for its own account is exempt from the disclosure requirement, but only if the grant is not effected by or through the franchisor. A franchisor's right to approve a grant, or a fee that does not exceed reasonable processing costs, does not by itself mean the grant was effected through the franchisor.
In practice, if the franchisor gets involved beyond simple approval and a reasonable processing fee, the sale may be treated as going through the franchisor, and the disclosure rules may apply. Whether that is the case depends on the facts.
If consent is withheld or conditions pile up
The Act does not set out a step-by-step remedy for a refused transfer. The duty of fair dealing is the main statutory tool for testing whether the franchisor acted in good faith and reasonably when it used its approval right. What you can do about it, and how strong your position is, depends on the agreement's wording and the reasons given.
Compare the common situations:
| Situation | What to look at |
|---|---|
| Franchisor refuses without giving reasons | The agreement's approval clause and the duty of fair dealing |
| Franchisor charges a large transfer fee | Whether it goes beyond reasonable processing costs |
| Franchisor insists on handling the sale | Whether the grant is effected through the franchisor, which affects the disclosure exemption |
| Buyer did not get proper disclosure | The buyer's rescission and damages rights |
The disclosure rules matter to the person buying your franchise, because the rights that come with them belong to the franchisee receiving the franchise, who in a resale is the buyer, and a late or incomplete disclosure can lead to claims that affect the transfer. A franchisee may rescind within 60 days after receiving a disclosure document if it was late or deficient, and within 2 years of entering the franchise agreement if no disclosure document was provided. A franchisee who suffers a loss from a misrepresentation in the disclosure document, or from a failure to comply with the disclosure rules, also has a right of action for damages. Sorting out who must give disclosure before closing helps avoid problems later.
What to do next
- Find the transfer clause and any fee schedule in your franchise agreement.
- Ask the franchisor, in writing, what it requires: approval criteria, documents, fees and timing.
- Keep a record of every request, response and reason given.
- Check whether the franchisor will be involved in the sale beyond approval, since that can affect disclosure.
- Confirm who will deliver the disclosure document to the buyer, and when, if disclosure is required.
- Have a lawyer review the agreement before you sign with a buyer or respond to a refusal.
Frequently asked questions
Can a franchisor charge a fee to approve my sale?
Your franchise agreement usually sets any transfer fee. A fee that does not exceed reasonable processing costs does not by itself mean the sale was effected through the franchisor. A larger fee raises questions that depend on the agreement and the facts.
Does selling the shares of my franchise company avoid the franchisor's approval?
Not necessarily. The Act treats a disposition of shares in the owning corporation as a grant. Your agreement may also treat a change in ownership as a transfer needing approval, so check its wording.
Does the franchisor have to act reasonably when approving a buyer?
Each party to a franchise agreement owes a duty of fair dealing, including good faith and reasonable commercial standards when exercising a right like approving a transfer. How that applies to a particular refusal depends on the facts.
Does my buyer get a disclosure document?
It depends. A franchisee selling for its own account may be exempt, but only if the grant is not effected by or through the franchisor. If disclosure is required, it must be received at least 14 days before the buyer signs or pays.
Sources
- Franchises Act, SBC 2015, c. 35 — bclaws.gov.bc.ca
Links go to official government, court and regulator pages. The law changes — confirm you are reading the current version.
This is a buying & selling a business question
Buying or selling a business with us is from $3,358.88, tax included. Third-party fees are extra.