What is a franchise resale?

A franchise resale is when a franchisee sells a franchise it already operates to someone new. The Canadian Franchise Association describes franchising as a business relationship in which an owner, the franchisor, gives a licence to a third party, the franchisee, to use its operating system, name, trademarked materials, products and marketing techniques. In a resale, it is the current franchisee, not the franchisor, who sells the franchise to a new owner.

Who is selling

In a first-time purchase, the franchisor grants the franchise. In a resale, the seller is the existing franchisee. Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000 refers to the grant of a franchise by a franchisee. Alberta’s Franchises Act refers to the sale of a franchise by a franchisee. Both list it separately from a sale by the franchisor.

Why the law treats it differently

Both statutes exempt that case from the franchisor’s disclosure duty if listed conditions are met: the seller is not the franchisor, its associate, or a director, officer or employee of either; the sale is for the franchisee’s own account; for a master franchise, the entire franchise is sold; and the sale is not effected by or through the franchisor. Both say a sale is not effected by or through the franchisor merely because the franchisor has a reasonable right to approve it, or charges a transfer fee set in the agreement or not above its reasonable actual costs to process the transfer. Whether a given resale qualifies is a legal question.

What it means for a buyer

The Canadian Franchise Association notes that, while many elements of franchise disclosure legislation are similar across provinces, there are important differences between jurisdictions. As a buyer, ask which province’s law governs your purchase, whether disclosure applies, and what the franchisor must approve. See what disclosure a franchise resale buyer gets for that narrower question.