Selling Shares in Your Franchise Company in BC: Does the Franchises Act Apply?

You own a company that holds a franchise, and a partner, investor or new owner wants to buy some or all of your shares. Because the company itself is not changing hands in the way an asset sale would, it is easy to assume franchise law does not come into it. In British Columbia, that assumption can be a costly mistake.

This article explains how the Franchises Act treats a share sale, when you may be exempt from giving a disclosure document, what rights the buyer may have if disclosure was required, and where the transfer fees and conditions actually come from. Every deal turns on its facts, so treat this as a map and not a substitute for advice on your agreement.

This article covers the law of British Columbia.

A share sale can still be a franchise resale

The Franchises Act defines "grant" to include the disposition of the franchise or of an interest in the franchise, and that includes shares in the corporation that owns the franchise. A franchise resale is therefore a grant under the Act. So selling shares, or part of them, to a partner or investor can bring the Act's rules into play even though the franchise agreement itself never changes hands.

There are two practical consequences. First, the disclosure rules in section 5 may apply to your sale. Second, the buyer may have the same remedies a first-time franchisee would have if disclosure was late, deficient or missing.

When the seller is exempt from disclosure

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. Both parts matter: you must be selling for your own account, and the franchisor must not be the one carrying out the sale.

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. So a franchisor simply signing off on the new owner, or charging a reasonable fee to process the paperwork, should not on its own remove your exemption. If the franchisor does more, such as running the sale or finding the buyer, the picture can change, and that is worth confirming with a lawyer before you proceed.

If disclosure applies: the 14-day rule

A prospective franchisee must receive the disclosure document at least 14 days before the earlier of signing a franchise agreement or a related agreement, or paying consideration relating to the franchise. If something material changes, a statement of material change must be delivered as soon as practicable after the change, and before signing or paying.

• Count 14 days back from the earlier of signing or the first payment, not from closing.
• A deposit can start the clock just as a signature can.
• A change after the document is delivered, such as a new term or a change in the business, may need a statement of material change.

What the buyer can do if things go wrong

On rescission, the franchisor must refund money, buy back inventory, supplies and equipment, and compensate losses. For a misrepresentation in the disclosure document, the franchisee is conclusively deemed to have relied on it. A person is not liable if the franchisee bought with actual knowledge of the misrepresentation. Whether these remedies fit a particular share purchase depends on the facts and on who was required to give disclosure.

Fair dealing, fees, PST and employees

Every franchise agreement imposes a duty of fair dealing on each party, including acting in good faith and according to reasonable commercial standards when exercising a right such as approving a transfer. A franchisor cannot use its approval right arbitrarily.

The Act does not have a stand-alone transfer section. The franchisor's approval rights, transfer fees and conditions usually come from the franchise agreement itself, so read that document closely.

Two side points. PST does not apply to the sale of shares of a business. And in a share sale the employer company does not change, so employees generally stay with the same employer, although the Employment Standards Branch guidance on business sales does not specifically address share sales.

What to do next

• Pull out the franchise agreement and find the transfer, approval and fee clauses.
• Confirm whether the franchisor is involved in finding the buyer or running the sale.
• Decide early whether you are exempt, and if not, prepare the disclosure document.
• Keep the 14-day period in mind before anyone signs or pays a deposit.
• Ask the franchisor in writing what its fee covers.
• Have a lawyer review the share purchase agreement and the franchisor's consent.

Frequently asked questions