How do I sell my franchise business?

A franchise can be sold, but a franchise is not sold the way an independent business is. The buyer is stepping into a relationship with the franchisor, and the franchise agreement controls how that can happen. If you are asking whether you can sell your franchise, the first document to read is your own agreement, the second is the law of the province where the franchise operates, and the third is the franchisor’s transfer process. This guide covers that order, uses Ontario’s statute to show what a provincial franchise law can say about a franchisee’s sale, and then turns to the tax accounts that close when a business is sold.

Read your franchise agreement first

The agreement is where a franchisor’s rights over a transfer are written down. Look for the clause on assignment or transfer, any right of first refusal, any requirement that the franchisor approve the buyer, any training or qualification the buyer must meet, and any fee. Also check what happens to the territory, the lease and the trademark licence. These terms decide how long a sale takes and what the buyer must be able to show. Our answer on what happens to a franchise agreement when you sell explains how the agreement moves to the buyer.

Franchise law is provincial

The Canadian Franchise Association states that in Canada, franchise disclosure is regulated at the provincial level rather than through a single national law. It adds that while many elements are similar across provinces, there are important differences between jurisdictions, and it lists the provinces with franchise disclosure legislation: Alberta, British Columbia, Manitoba, New Brunswick, Ontario, Prince Edward Island and Saskatchewan. British Columbia, for example, has its own Franchises Act, with its own definitions of a franchise and a franchisor. So what follows about Ontario is Ontario’s rule, not a national one. If your franchise operates in another province, check whether that province has a franchise statute at all, and ask a lawyer who practises there.

Ontario: a duty of fair dealing applies

The Arthur Wishart Act (Franchise Disclosure), 2000 applies where the franchised business is operated partly or wholly in Ontario. Under it, every franchise agreement imposes on each party a duty of fair dealing in its performance and enforcement. The Act says that duty includes the duty to act in good faith and in accordance with reasonable commercial standards. That binds you as much as the franchisor. If you are selling, the duty applies to how you and the franchisor perform and enforce the agreement, including its transfer terms. The Act gives a party to the franchise agreement a right of action for damages against another party who breaches the duty.

Ontario: your own sale and the disclosure rules

Section 5 of the Act requires a franchisor to give a prospective franchisee a disclosure document. Section 5(7) says that section does not apply to the grant of a franchise by a franchisee if conditions are met. Those conditions are that the franchisee is not the franchisor, its associate, or a director, officer or employee of either; that the grant is for the franchisee’s own account; that for a master franchise the entire franchise is granted; and that the grant is not effected by or through the franchisor. Section 5(8) adds that a grant is not effected by or through a franchisor merely because the franchisor has a right, exercisable on reasonable grounds, to approve or disapprove it. Whether your sale meets every condition is a question for a franchise lawyer.

Ontario: transfer fees

The same section 5(8) says a grant is also not effected by or through the franchisor merely because a transfer fee must be paid, in an amount set out in the franchise agreement or in an amount that does not exceed the reasonable actual costs the franchisor incurred to process the grant. That subsection does not cap transfer fees; it decides only whether paying one takes your sale outside the resale exemption from disclosure. Check the fee your agreement states and ask the franchisor how it arrived at any other figure. What is a franchise transfer fee covers the term in general.

Tax accounts when the business is sold

The CRA says that if the business you are selling has a business number, you should contact your tax services office because you might have to cancel it. If the business has employees, you must close your payroll account, and if it has a GST/HST account, you must contact your tax services office to close it. The CRA also says you may be able to jointly elect with the purchaser to have no GST/HST payable on the sale, using Form GST44, but not if you sell only one or more assets of the business, or if you are a registrant and the purchaser is not. Your accountant can confirm which apply to your structure.

Prepare what the buyer and franchisor will ask for

Whatever the statute says, have your paperwork ready before you look for a buyer. Gather the franchise agreement and every amendment, your recent financial statements, the lease, equipment and vehicle lists, and records showing you are in good standing with the franchisor. Ask the franchisor in writing what its transfer process requires and how long it takes. Tell the franchisor about a likely buyer early, since the buyer may need to qualify. Our franchise approval checklist lists what a franchisor may ask a buyer to show.

• Your franchise agreement and amendments, with the transfer, approval and fee clauses marked.
• The province where the franchise operates, and that province’s franchise statute.
• The franchisor’s written transfer requirements, timetable and fee.
• A decision on assets or shares, and who handles the CRA account closures and the GST44 election.