Selling Your Alberta Franchise: Franchisor Approval and Transfer Rules

Selling a franchise is not like selling an independent shop. You do not own the whole brand, the systems or often the right to operate. Your franchise agreement usually controls who can take over, and the franchisor often has a say.

This article explains the usual parts of a franchise transfer: approval, the assignment clause, a right of first refusal, transfer fees, and what happens to your obligations afterward. It also covers the GST and financing points that come up when a business is sold. Your own agreement is the starting point, so read it closely and have a lawyer review it before you sign anything.

This article covers the law of Alberta.

Do you need franchisor approval to sell?

In most franchise arrangements, the answer is found in the agreement you signed. Many agreements say you cannot transfer the franchise, or any interest in it, without the franchisor's written consent. Some say the franchisor cannot unreasonably withhold consent. Others set out conditions that must be met first.

Whether a franchisor can refuse or attach conditions, and how far, depends on the wording of your agreement and on any Alberta franchise rules that apply to your situation. Because the details vary, a lawyer should confirm your position before you list the business or accept an offer.

Also remember that a sale of shares in the company that holds the franchise can still count as a transfer under some agreements. A change in control clause may catch it even though the franchise itself never changes hands.

Clauses to find in your franchise agreement

Before you talk to buyers, locate these provisions. They decide how much time, cost and control you have in a sale.

• Assignment or transfer clause: who must approve, what the franchisor may consider, and how long it has to respond.
• Right of first refusal: a right that lets the franchisor match a buyer's offer and buy the business itself instead.
• Transfer fee: an amount you or the buyer must pay the franchisor, and whether it covers training or legal costs.
• Buyer qualifications: financial strength, experience and any required training.
• Conditions on you: being up to date on royalties and other payments, and signing a release.
• Renewal terms: whether the buyer gets a fresh agreement or takes over the remaining term.

A right of first refusal can affect timing. You may need to give the franchisor the buyer's terms and wait before closing. Check what notice the clause requires and what happens if you skip it.

What happens to the agreement and your obligations after the sale

There are usually two paths. In one, the buyer signs a new franchise agreement and your agreement ends. In the other, your agreement is assigned to the buyer. Either way, the key question for you is whether the franchisor releases you from future obligations.

If you are not released, you could stay responsible for things such as lease guarantees, personal guarantees to the franchisor or supplier debts. Ask for any release in writing and make sure it covers the same obligations the buyer takes on.

Some agreements also continue to bind you after you leave, for example through restrictions on competing or on contacting customers. Whether those restrictions can be enforced depends on their wording and the circumstances, so have them reviewed rather than assuming they do or do not apply. Employee, lease and supplier arrangements also need to be addressed in the sale terms, and a lawyer can help with those.

Tax and financing points for the sale

If you sell the business and the buyer gets all or substantially all of the property reasonably necessary to carry on that business, a special GST rule can apply. Without an election, each property and service in a business sale is treated as a separate supply, so GST at 5% in Alberta can apply to the taxable parts. Alberta has no provincial sales tax.

The buyer and seller can avoid that by making a joint election, using the CRA form GST44, in the prescribed form with the prescribed information. If the election is valid, no tax is payable on the supplies under the agreement.

• The election is not available if the seller is a GST registrant and the buyer is not.
• Tax can still be payable on a taxable service the seller will render, on a taxable lease, licence or similar supply of property, and on a taxable sale of real property where the buyer is not a registrant.
• If the buyer is a registrant, it must file the election with the Minister by the filing deadline for its first reporting period in which tax would otherwise have become payable. The Minister may accept a later date on the buyer's application.

On financing, the Canada Small Business Financing Program can finance the eligible assets of an existing business, capped at the lower of the purchase price or the appraised value of those assets. It does not finance share purchases or assets acquired by a holding company. Eligibility is generally limited to businesses with gross revenues of $10 million or less. Under the Canada Small Business Financing Program, the maximum financing is $1.15 million in total, made up of up to $1 million in term loans and up to $150,000 in lines of credit, and the borrower and lender negotiate the actual amount.

What to do next

• Read your franchise agreement and mark the assignment clause, right of first refusal, transfer fee and any release language.
• Ask a lawyer to review the agreement and explain what the franchisor can require in your case.
• Contact the franchisor early to learn its process, forms and timelines, and keep the contact in writing.
• Check whether the sale will be of assets or shares, and speak to an accountant about the GST election.
• Run searches on the business. Alberta Corporate Registry searches, requested through a registry agent, can show the registration date, owners, directors and legal addresses.
• Agree on who pays transfer and legal costs, and get releases in writing before closing.

Frequently asked questions