Outstanding Franchisor Defaults: What to Check Before Buying a Resale Franchise in Ontario

A franchise location can look financially healthy on paper while quietly carrying unresolved problems with the franchisor — unpaid fees, standards violations, or a dispute that never got closed out. If those issues aren’t identified before closing, an outstanding franchisor default from the previous owner can become the new owner’s problem.

This is one of the risks that makes a franchise resale meaningfully different from buying an independent business. You’re not just evaluating the seller’s relationship with customers, staff, and landlords — you’re also evaluating their standing with a franchisor who has ongoing contractual leverage over the location.

Common Types of Franchisor Defaults to Watch For

• Unpaid or late royalty payments
• Unpaid contributions to a marketing or advertising fund
• Failure to meet the franchisor’s operating standards, such as cleanliness, staffing, branding, or product sourcing
• Unresolved complaints or compliance notices from the franchisor
• Health, safety, or licensing issues flagged by the franchisor or a regulator
• An open dispute or litigation between the current franchisee and the franchisor

Any of these can affect whether the franchisor will approve your purchase at all, separate from whether the underlying business itself is sound.

Deal Structure Changes Who Inherits the Problem

Whether a franchisor default becomes the buyer’s issue depends heavily on how the purchase is structured:

• Share purchase. The corporation that holds the franchise agreement changes ownership, but the corporation itself, and everything attached to it, including its franchise relationship and any outstanding defaults, comes with the deal unless specifically addressed in the purchase agreement.
• Asset purchase. The buyer and seller identify which specific assets and liabilities transfer. If the buyer is also required to sign a new franchise agreement directly with the franchisor, which is common in franchise resales, the franchisor typically wants existing defaults resolved before it will enter into that new agreement, but this shouldn’t be assumed without direct confirmation.

Neither structure automatically protects a buyer from a franchisor default that isn’t identified and addressed before closing.

Protecting Yourself in the Purchase Agreement

• Require the seller to make specific representations and warranties about their compliance with the franchise agreement, including that no defaults or unresolved notices exist
• Use a disclosure schedule to have the seller specifically list any known issues with the franchisor
• Negotiate an indemnity that covers pre-closing defaults or liabilities owed to the franchisor
• Consider a holdback, withholding part of the purchase price for a defined period after closing, to secure that indemnity if an issue surfaces later

Get It From the Franchisor Directly

The seller’s own account of their standing with the franchisor is a starting point, not the final word. Requesting written confirmation directly from the franchisor, covering outstanding amounts owed, any open compliance issues, and whether the location is in good standing, is one of the more reliable ways to verify what you’re actually buying into.

Making Franchisor Confirmation a Condition of Your Offer

Rather than treating franchisor confirmation as a nice-to-have, build it into the deal structure itself:

• Make your offer conditional on receiving satisfactory written confirmation from the franchisor before you’re bound to close
• Give yourself enough time in the conditional period to actually receive and review that confirmation, rather than a token few days
• Have your lawyer, not just the seller or the seller’s agent, request the confirmation directly from the franchisor
• Treat a franchisor’s refusal or delay in confirming good standing as a signal worth investigating further, not a routine administrative hiccup

Frequently asked questions