Franchise Resales: What to Expect
In your franchise search, you may have come across resales. These are already operating, existing locations being offered for sale by a current franchisee. In franchise agreements, there is no one-size-fits all set of conditions for transfers of a Canadian franchise location. However, there are some terms that are used enough to be considered standards in the industry, so keep reading to learn more about franchise resales in Canada.
The common terms
Generally, a franchisor will have the right to approve the resale as long as certain conditions are met. These include the franchisor approving the buying franchisee based on his or her professional and financial situation, the completion of company training by that franchisee and the new franchisee being in full compliance with the franchise agreement. The franchisor may let the new franchisee assume the existing franchise agreement, or he or she may have to sign a new one. A transfer fee may apply, and this is normally paid by the selling franchisee.
What to know
The buying franchisee is essentially becoming a brand ambassador for the system, so the approval decision is not one that's taken lightly. A typical franchise agreement will have many conditions that both the selling and buying franchisee have to meet before getting resale approval. The franchisor will also want to make sure the price is reasonable, although the brand should not get too involved in the transaction taking place between the seller and buyer.
How transfer fees are handled varies by system. The fee may be structured to cover what the franchisor spent in training and approving the new franchisee, or it may act as a stream of revenue for the company. Before the deal is done, both the buying and selling franchisee should know how the fee will be handled.
In Canada, some case law has developed pertaining to the releases a franchisor requests from a selling franchisee. Generally, this is because the franchise laws in the provinces that have them don't allow a franchisor to force a franchisee to waive or release rights he or she has under any applicable laws. You may want to seek legal advice if you're not sure whether the franchiser's releases will be enforceable when it comes to the franchisee you're buying from.
As a general rule, banks prefer financing existing businesses like franchise resales as they can count on historic earnings to guide their interest rate and secure their return on investment as opposed to rely on projections.
A franchise resale can be a great way to get off the ground running, as you're getting a location that is already in business. As with other franchise options, make sure you do all your homework before taking one on.