What does a franchisee actually own and have the right to sell?

A franchisee may own some things outright and hold others under licence, and a sale has to keep the two apart. Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 defines a franchise as a right to engage in a business, so the right itself is something the franchisor grants. Where the franchise rests on a trade-mark, the Act describes that mark as owned by or licensed to the franchisor or its associate.

The franchise right is granted, not owned outright

The Act’s definition describes a right to sell goods or services substantially associated with a trade-mark or trade name owned by or licensed to the franchisor or its associate, where the franchisor or its associate has the right to exercise or exercises significant control over, or has the right to provide or provides significant assistance in, the franchisee’s method of operation. A second branch covers distribution rights with location assistance. Because the right comes from the franchisor, check your agreement, not just your ownership of the business, for how it can be passed on.

A sale is a “grant”, even of shares

The Act says a grant includes the sale or disposition of the franchise or of an interest in it, and an interest includes ownership of shares in the corporation that owns the franchise. So selling the shares of your franchise company can count as a grant, not only an asset sale. Section 5(7) sets out some exemptions to the franchisor’s disclosure duty, including some resales by a franchisee that meet every listed condition, and under section 12 the burden of proving an exemption in any proceeding under the Act is on the person claiming it.

What the Act says about the franchise system

The Act’s definition of a franchise system includes the marketing, marketing plan or business plan, the use of or association with a trade-mark, the franchisor’s and franchisee’s obligations on operating the business and the goodwill associated with the franchise, and British Columbia’s Franchises Act uses the same list. That list describes the system, not who owns each piece. Ask the franchisor what the agreement says about the goodwill, the supplier relationships and the customer data, and ask your lawyer which of them can be transferred.

Items to confirm before you list

• Which equipment, leasehold improvements and inventory belong to you outright.
• Whether the lease can be assigned and whether the franchisor holds a right in it.
• What the franchisor must approve, and on what grounds.
• Whether a share sale counts as a transfer under the agreement.