Want To Resell Your Franchise? Here’s What You Need To Know

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Franchise resale is a common goal for many franchisees who invest with the expectation of eventually profiting from the sale of their business. Franchise agreements acknowledge this by allowing franchisees to transfer their business, with the franchisor’s prior written consent, to a third party. It’s crucial to work with a lawyer specializing in franchise law to navigate these provisions effectively and ensure a smooth transfer process. To help you understand what is involved when reselling a franchise and some of the requirements to look out for we’ve compiled this helpful guide below though if you have questions, contact us at any time. We’re here to help you every step of the way.

The Personal Nature of Franchise Grants

Granting a franchise is a personal decision by the franchisor, involving a thorough assessment of each candidate. The franchise term is limited and may include renewal options, but ultimately, the franchisee’s rights to operate will end, often without compensation for their efforts. The franchisor can then resell the business, potentially at a higher value due to the franchisee’s work.

The Unique Nature of Franchise Resales

Franchised businesses differ from other businesses in resale due to the franchisor’s vested interest in the business’s value. Franchisees should review their franchise agreement with a lawyer to ensure any transfer fees charged by the franchisor are specified in the agreement, as some franchisors may attempt to charge extra fees.

Franchisees should understand the steps involved in transferring their franchise agreement. Typically, a franchisee lawyer will draft a purchase agreement that is conditional on getting the franchisor’s approval and, if the franchisee holds the lease, the landlord’s consent. Once finalized, the agreement is sent to the franchisor for approval.

Transfers usually take 45 to 90 days to complete, depending on factors such as:

  • Whether the franchisor wants to use its right of first refusal to buy the business.
  • Whether the franchisor requires the buyer to sign a new franchise agreement or just consent to the transfer.
  • Whether the franchisor needs to provide a disclosure document, and how long it takes to prepare.

Additional requirements include:

  • No existing defaults on the franchisee’s part.
  • Settling all accounts with the franchisor and third parties.
  • The buyer agreeing to take on the franchisee’s obligations or signing a new franchise agreement, which may have different terms.
  • The buyer and key employees completing the franchisor’s training program.
  • The franchisee paying transfer fees, which could be a flat fee or a percentage of the sale price.
  • The franchisee covering the franchisor’s costs of processing the transfer.
  • The franchisee providing a release of liability for the franchisor.

Transfer Provisions and Discretion

Transfer Provisions are broadly defined, covering sales, assignments, pledges, and other conveyances, including granting security to lenders and the realization of that security. Franchisees must be cautious not to inadvertently trigger these provisions, such as when issuing new shares or bringing in new partners which is why working with a franchise lawyer is essential. Typically, transferring to a family member upon the franchisee’s death or disability is less restrictive.

Regarding the release in favour of the franchisor, the Ontario Court of Appeal’s decision in the Midas case (405341 Ontario Limited v. Midas Canada Inc.) determined that franchisors cannot require a release as a condition for transferring a franchise agreement. The court ruled that requiring such a release for renewing a franchise is generally unenforceable and violates franchise laws, specifically the Arthur Wishart Act (Franchise Disclosure) 2000. Therefore, franchisees should resist if a franchisor tries to impose this requirement.

Legal Recourse for Franchisees

If a franchisor improperly withholds consent for a sale, franchisees may sue or arbitrate, although this process is often slow and may result in losing the buyer. Consulting with your lawyer is the best approach if you encounter this obstacle to your sale to figure out the best course of action.

Business Value, Costs, and Contract Term

The resale value of a franchise depends on the remaining term of the agreement. Franchisees and franchisors might negotiate the share of the sale price if an extension or new term is granted to the purchaser.

Franchise agreements usually require franchisees to pay fees and the franchisor’s legal costs during a sale. The franchisor may also control how the business is listed for sale to protect the brand.

Franchisor’s Right to Acquire Assets

To resell a terminated franchise, the franchisor needs clear title to the business assets, often requiring security arrangements to manage debts and encumbrances. However, the franchisor should have rights to operate the business while resolving these issues.

Disclosure Requirements

In provinces with franchise legislation, franchisors must decide whether to provide statutory disclosure to the buyer. Failure to disclose can result in severe penalties, including the buyer’s right to rescind the agreement within two years.

Churning in Franchising

“Churning” refers to a franchisor ending franchise agreements prematurely, typically due to alleged defaults, to repeatedly resell the same business. This practice does not include normal re-franchising activities even if the business fails repeatedly.

If You’re Thinking Of Selling Your Franchise, An Experienced Lawyer Is Essential To The Process

The resale of a franchised business involves specialized considerations. Franchisors, franchisees, and brokers need to work with legal counsel to understand these differences to navigate the process effectively. If you’re reselling your franchise, give Hukam Law a call. We have the experience and expertise to make sure that the transfer is done properly and without legal repercussions with your franchisor. You can reach us at 705-915-0884 or via email at info@hukamlaw.ca and we look forward to your call.

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***The information provided in this blog is for general informational purposes only and should not be construed as legal advice. If you have legal questions, we strongly advise you to contact us.