Franchise purchase guidance before you commit to the brand

A franchise purchase involves acquiring the right to operate a business using an established brand’s name, trademarks, and operating system. The purchase may involve opening a new location through the franchisor or buying an existing business from a current franchisee, often called a franchise resale.

Although the business follows an established model, the buyer still needs to understand the investment, operating restrictions, and liabilities involved. The franchise agreement, disclosure documents, financing, and commercial lease should be reviewed together before the transaction proceeds.

The franchise purchase process

The steps depend on the franchise system and whether the purchase involves a new location or an existing business. They may include:

1. Receiving the disclosure document. The franchise disclosure document, or FDD, provides information about the franchise business, financial statements, fees, litigation history, and proposed agreements. Generally, where disclosure is required, Ontario requires the FDD to be provided at least 14 days before signing a franchise-related agreement or paying consideration, subject to statutory exceptions. See section 5 of Ontario’s Arthur Wishart Act (Franchise Disclosure), 2000.
2. Legal and financial review. The buyer and their advisers review the FDD and proposed franchise agreement to understand fees, royalty structures, restrictive covenants, and other potential liabilities.
3. Corporate structuring. A corporation may be established to act as the franchisee. The structure and any required personal guarantees need to be considered together when assessing the buyer’s personal exposure.
4. Location and lease arrangements. Where needed, a commercial location is identified and a lease is negotiated. The lease term and obligations should be coordinated with the franchise agreement.
5. Signing and funding. Once applicable disclosure requirements and transaction conditions have been addressed, the parties sign the relevant agreements and guarantees, arrange payment of the initial franchise fee, and finalize the lease.
6. Training and opening. The buyer completes required training and any location construction or fit-out before opening the business or taking over operations.

How our office can help

We assist franchise buyers with understanding the proposed investment and addressing legal issues before they commit. Depending on the transaction, our work may include:

• FDD and contract review: Explaining financial obligations, operating restrictions, fees, and other terms in the disclosure document and franchise agreement.
• Disclosure compliance: Assessing disclosure under Ontario’s Arthur Wishart Act and advising on potential remedies where disclosure is missing or deficient. Any available rescission rights depend on the circumstances and applicable deadlines.
• Personal guarantees: Explaining the scope of personal liability and seeking negotiated limits where the franchisor is willing to agree.
• Commercial lease coordination: Reviewing and negotiating the lease with the franchise arrangement in mind, including the risk of rental obligations continuing after franchise rights end.

Our office helps clients approach a franchise purchase with a clearer understanding of the commitments they are making and the issues that need to be resolved before closing.