What is different when the business I am buying is a franchise?

The 14-day disclosure rule

Section 5(1) of the Arthur Wishart Act (Franchise Disclosure), 2000 requires a franchisor to give a prospective franchisee a disclosure document, and the franchisee must receive it not less than 14 days before the earlier of signing the franchise agreement or any other agreement relating to the franchise, and paying any consideration to the franchisor. The only agreements excluded are pure confidentiality agreements and site or territory designations, and the only payment excluded is a fully refundable deposit within the prescribed amount that does not bind you.

The contents are set by O. Reg. 581/00: the franchisor's background, litigation, fees, financial statements, the agreements you will sign and a list of current and former franchisees. Read it with your accountant and with us.

Rescission and damages if disclosure fails

The Act has teeth. Under s. 6(1), if the disclosure document was late or deficient, you may rescind the franchise agreement without penalty within 60 days of receiving it. Under s. 6(2), if no disclosure document was ever provided, you may rescind within two years of signing. Rescission requires written notice and obliges the franchisor to refund what you paid and compensate your losses in setting up.

Section 7 gives a right to damages for misrepresentation in a disclosure document against the franchisor, its associates and everyone who signed it. Section 3 imposes a duty of fair dealing on both parties to every franchise agreement, and s. 4 protects your right to associate with other franchisees.

Resales: when the franchisor need not disclose

When you buy an existing location from a franchisee rather than a new franchise from the franchisor, s. 5(7)(a) says the disclosure obligation does not apply if the selling franchisee is not the franchisor or its associate, sells for its own account, and the grant is not effected by or through the franchisor. Courts read the exemption narrowly. Where the franchisor is actively involved, for example by requiring you to sign a new franchise agreement on its current form, charging a transfer fee or approving you, the exemption may not apply and a disclosure document may still be required.

Either way, ask for the current disclosure document. Many franchisors provide one on resale as a matter of practice.

Franchisor consent and the transfer process

Nearly every franchise agreement prohibits transfer without the franchisor's consent and sets conditions: a transfer fee, training for the new owner, curing the seller's defaults, signing the franchisor's current form of agreement, standing as personal guarantor and sometimes a right of first refusal in the franchisor's favour. The remaining term and renewal rights deserve as much attention as the price, since a short term with no renewal makes the business hard to finance and resell.

Your purchase agreement should make franchisor consent a condition, allocate the transfer fee, and deal with what happens if the franchisor insists on changed terms.

We review the franchise agreement and disclosure document, count the fourteen days, and make franchisor consent a condition of your purchase agreement.

The lease, the franchisor and the landlord

Franchisors often hold the head lease and sublet to the franchisee, or take a conditional assignment of the lease so they can step in if the franchisee fails. That means two consents, the landlord's and the franchisor's, and two sets of documents on closing. Check whether the lease term matches the franchise term, whether the franchisor's lease rights survive the transfer, and who is responsible for the landlord's costs. Where the franchisor controls the premises, its consent and the landlord's are usually processed together.