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Canadian Franchisee Q&A: What is a GSA?
When you enter into a Canadian franchise agreement, the number of documents you have to review and sign can be pretty impressive. In most cases, your franchise agreement will come with a lot of other contracts, and among them is the general security agreement (GSA). It's only natural that most of your attention will be focused on the main agreement's terms, but it's important to understand what ancillary agreements like the GSA mean for you now and in the future.
What a GSA does
If you've ever taken out a credit line or loan before, you've probably signed a GSA. Before you got loan approval, the bank might have asked you to put up an asset as collateral to back the loan so that the bank would have the right to repossess that asset should you default.
Similarly, when you sign a GSA along with a franchise agreement, you are giving the franchisor the ability to go after the assets the GSA covers if you default on the terms of the franchise agreement. Generally, the assets in a franchise GSA are personal property connected to the business, such as inventory and equipment, and the location's proceeds, accounts and revenue.
Why franchisors use GSAs
A GSA serves as evidence of the franchisor's secured interest in the franchise business. To have this interest recognized, the franchisor has to register the lien under the applicable laws of the province. Once it's registered, the franchisor gains some rights in the event the franchisee defaults and priority over other parties who may gain an interest in the franchisee's assets down the road.
The impact on your business
Generally speaking, the GSA should not impact your day-to-day operations as long as your franchise agreement is in good standing. It's important to note that a lender will search for liens if you need financing and may require that the franchisor "subordinate" its interest in your franchise, which means it will be lower in enforcement priority than the lender. Franchises will normally do this, but to be on the safe side, make sure your GSA states the franchisor will do this so you don't run into problems when you need financing.
As with your franchise agreement, review the GSA and other documents you're required to sign before you finalize your deal. With such a big investment, it's important you completely understand everything you're agreeing to.