Buying and Selling Quick-Service Restaurants (QSRs)

Contact Neufeld Legal for QSR legal matters at 403-400-4092 / 905-616-8864 or Chris@NeufeldLegal.com

Buying or selling a Quick Service Restaurant (QSR), especially a franchise, involves complex legal and operational challenges that require rigorous due diligence. The franchised nature of most QSRs adds significant layers of complexity to a standard business sale.

Franchise Agreement & Transfer Challenges

The core of a QSR transaction often revolves around the franchise agreement, which dictates the terms of the brand relationship.

Franchisor Approval of Transfer: This is typically the single biggest hurdle. The sale is almost always contingent on the franchisor approving the buyer (the new franchisee). The franchisor has a vested interest in the buyer's financial health, management experience, and willingness to adhere to brand standards. In turn, the buyer must meet all of the franchisor's current, often stringent, qualification criteria, even if the seller was grandfathered under older, less restrictive terms.
Transfer Fees and New Agreements: The franchisor usually charges a transfer fee and may require the buyer to sign the current form of the Franchise Agreement (FA), which could have terms significantly different from the seller's original contract (e.g., higher royalties, new renovation requirements, or system upgrades).
Territorial Rights and Encroachment: Buyers must scrutinize the FA's clauses on territorial exclusivity, if any. Otherwise, the franchisor may reserve the right to open competing outlets or use alternate distribution channels (like delivery services or non-traditional locations) that could encroach on the franchisee's sales area.
Renovation and System Requirements: Franchisors frequently require franchisees to perform expensive renovations or upgrades to Point-of-Sale (POS) systems, digital platforms, or equipment (system-wide mandates). As such, the buyer must determine if the seller has deferred any mandated upgrades and factor the potential cost into the purchase price, as the franchisor will likely require immediate compliance upon transfer.

Real Estate and Lease Issues

QSRs are heavily dependent on their physical location, making the lease a critical legal document.

Landlord Consent: If the seller leases the location, the lease agreement almost always requires landlord consent for a change in ownership (assignment of the lease or change of control of the business entity). In turn, obtaining landlord consent can be time-consuming and difficult, potentially delaying or killing the deal. Landlords may demand new terms or personal guarantees from the buyer.
Lease Term and Renewal Options: The remaining term of the lease and the terms for any renewal options must be sufficient to secure the buyer's investment. As such, buyers must confirm that the lease's renewal conditions are satisfactory and that there are no current disputes between the landlord and seller that could jeopardize the tenancy.

Operational and Financial Due Diligence

A thorough legal review is essential to uncover hidden liabilities.

Financial Representations: Buyers need to verify the seller's financial representations, reviewing detailed sales, profit margins, and Key Performance Indicators (KPIs) like Average Unit Volumes (AUVs) and same-store sales.
Supplier Contracts: QSRs often have mandatory purchasing requirements from designated or approved suppliers. Thus, buyers need to understand the cost structure and terms of material supply contracts to ensure profitability, especially regarding potential exclusivity or minimum purchase volume clauses.
Licenses and Permits: The business must hold all necessary operating licenses and permits (food service, health, liquor, fire, etc.), and the buyer must ensure they can be successfully transferred or re-issued in their name.

Employment and Labor Law Risks

The transfer of employees during the sale can create significant legal exposure.

Successor Liability: In an asset purchase, the buyer generally gets to choose which employees to hire, but they may still inherit certain liabilities, such as for unpaid wages or severance obligations, or for continuity of service for statutory entitlements (like vacation). In a share purchase, the business entity - and all its existing employee obligations and potential liabilities - remains intact.
Employment Contracts and Disputes: Due diligence must include a review of all employee contracts, union agreements (if applicable), and any history of wage, discrimination, or termination disputes. Of particular relevance are undisclosed or active labor disputes or potential wrongful dismissal claims can be costly. Buyers must understand the local and federal employment standards regarding employee transfer, severance, and recognition of prior service.
HR Compliance: Ensuring compliance with minimum wage, overtime, workplace safety, and scheduling laws is critical, as the QSR industry is highly regulated in this area.

Intellectual Property

The transaction involves the use of the franchisor's trademarks and proprietary system.

Proper Trademark Usage: The buyer's rights to use the brand name, logos, and proprietary systems are entirely governed by the FA. Any unauthorized use by the seller or buyer can lead to franchisor termination.
Data and POS Systems: Buyers assume responsibility for customer data and privacy compliance related to the store's POS and digital systems, which the franchisor often dictates.

For knowledgeable and experienced legal representation in starting, operating and managing a quick-service restaurant (QSR), including the business' paticular legal demands and challenges, contact QSR lawyer Christopher Neufeld at strong>403-400-4092 [Alberta], 905-616-8864 [Ontario] or Chris@NeufeldLegal.com.

QSR Franchise Legal Review