Buying a Franchise Resale, Inheriting Someone Else's Severance Bill

The situation

Winston had spent years maintaining other people's properties as a landscaper, and Simone had worked the front desk of a hotel long enough to know the schedule of every regular guest. Both wanted something that was theirs. When a small quick-service franchise location came up for resale in Mississauga, owned by a man named Rejean who was retiring after more than a decade running it, it looked like the right size and the right price for a first business: an asking figure that landed comfortably inside the couple's savings and financing capacity, with an established customer base and a staff already in place.

The deal was structured, as most small business purchases are, as an asset sale. In an asset sale, the buyer purchases the specific things that make the business work — the equipment, the lease, the inventory, the goodwill, the franchise agreement itself — rather than buying the shares of the corporation that owns them. Buyers generally prefer this structure because it lets them pick and choose what they are taking on, leaving old liabilities, old contracts and old disputes behind with the seller's corporation. Part of the appeal for Winston and Simone was exactly that separation: neither of them wanted to inherit a corporate history they had no part in, and the franchisor's approval process for the resale was already underway, giving the deal a real deadline to work toward. Winston and Simone came to Treadstone Law expecting a fairly routine review of the agreement of purchase and sale before they signed.

What due diligence found

Part of a proper due diligence review — the process of verifying what a business actually is before money changes hands — includes looking at who works there and how long they have been there. Rejean's location had six employees, three of whom had been with the business for a long time: one for fifteen years, one for twelve, one for ten. The other three were more recent hires.

This is where the asset-sale assumption ran into a wrinkle that surprises a lot of first-time buyers. Ontario's Employment Standards Act, 2000 sets out minimum entitlements when an employee's job ends, including notice of termination or pay instead of notice, calculated by length of service. The statute also addresses what happens when a business is sold: if the new owner keeps an employee on with no real gap in their work, that employee's service is treated as continuous for the purpose of calculating those entitlements — as though they had worked for one employer the whole time, not two.

In practical terms, that meant if Winston and Simone bought the business, kept the existing staff on (which they intended to do, since running the location without trained employees on day one was not realistic), and then ever had to let one of the long-tenured staff go without cause, the termination pay owed would be calculated using that employee's full history — including all the years worked for Rejean, before Winston and Simone owned anything. The asset-sale structure had not actually left that liability behind. It had followed the employees through the door.

What we did

1. Quantified the worst-case exposure. Using each employee's actual start date and current wage, we calculated the termination pay that would be owed to each of the six staff if they were let go without cause the day after closing, using their full deemed service including the years worked under Rejean. The three long-tenured employees each qualified for the statutory maximum of eight weeks' pay; the three newer hires qualified for less. Added together, the total contingent liability came to roughly $19,000 — money the business would owe under the Employment Standards Act, 2000 that had nothing to do with anything Winston and Simone had done, and that they would be carrying from the moment they signed.
2. Explained why simply not rehiring the staff would not solve it. Winston initially asked whether the fix was for Rejean to lay everyone off before closing, so the couple could hire a fresh team with no history. This does not work as a workaround: if the same employees are kept on doing the same jobs with only a brief pause, the law still treats their employment as continuous, and a short gap can also trigger its own termination pay obligation for Rejean. The exposure was real regardless of how the staffing transition was timed, so it needed to be addressed in the deal itself rather than engineered around.
3. Brought the number back to the negotiating table. We prepared a short summary of the calculation and raised it with Rejean's side before the agreement was finalized, framing it plainly: the couple were willing to keep the staff on, which was good for continuity and good for Rejean's legacy at the location, but they should not be the ones absorbing years of accrued liability that predated their ownership.
4. Negotiated a price adjustment rather than a promise. Rather than relying on a seller indemnity — a clause promising to reimburse the buyer later, which is only as good as the seller's ability and willingness to pay years down the road — we negotiated a straight reduction to the purchase price equal to the quantified exposure. This meant the risk was priced in and settled at closing, not left as a future claim against someone who might, by then, be difficult to reach.
5. Documented the employees' deemed service dates in the closing materials. So that if the couple ever did need to make a termination decision years later, there would be no dispute about when each employee's clock had actually started running.

The outcome

Rejean's side pushed back initially, arguing that the staff were an asset, not a liability, and that a stable team was worth something to the buyer. That is a fair point in principle, and it is part of why the parties settled on a price reduction rather than Winston and Simone walking away from the deal — the couple wanted the staff to stay. But wanting continuity and being asked to personally fund someone else's decade of unpaid severance risk are two different things, and once the number was laid out in writing, Rejean's side agreed to the adjustment rather than risk losing the sale.

The purchase price came down by close to $19,000 from the original asking figure, and the deal closed on schedule. Winston and Simone kept the full existing team, including the three long-tenured employees, and started their ownership with accurate records of exactly how much deemed service each person carried. No one was terminated as a result of the sale, and the couple's actual out-of-pocket exposure never materialized — but if it ever does, years from now, they will not be paying it out of pocket a second time, because it was already reflected in what they paid for the business.

The franchisor's consent to the resale came through a few weeks later without complication, once the assignment paperwork was updated to reflect the new ownership. Looking back, Winston said the employee due diligence was the part of the deal he understood the least going in and valued the most once it was explained — he had assumed, like most first-time buyers do, that a fresh business meant a fresh start on staffing questions, and was surprised to learn how much of the old business followed the employees rather than the paperwork.

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