For many franchise networks, the succession of franchisees is a major and, in some cases, increasingly pressing challenge.
In the short term, this challenge will affect mature networks in particular, but eventually it will apply to all franchisors, since, of course, no one is spared from ageing or illness.
How does your franchise agreement deal with this reality, which is even more certain than death(since the vast majority of franchisees leave a network long before they die)?
In almost all franchise agreements, this reality is dealt with only through the sale and assignment clauses, which set out first and foremost the franchisee's obligation to obtain the franchisor's consent before disposing of its franchised business, or any interest therein.
According to these clauses, the request for approval of a sale or assignment can only be made when the franchisee wishes to assign its interests, and not before.
This makes it extremely difficult, if not impossible, for the franchisee to plan his succession to ownership, or even his succession to management, of his franchised business, since he has no assurance that the franchisor will accept the person, or persons, to whom he would like to transfer his business or place in its management.
At a time when succession planning has become a major challenge in franchising, is it possible to do better?
Indeed, some franchisors are beginning to add a " designated successor " clause to their franchise agreements, which provides for the franchisor's early approval of one, or a few, people to manage and own the franchised business.
In this way, when the franchisee's succession planning process reaches the stage of choosing the people to whom he or she will eventually want to transfer the business or entrust its management, the franchisee can, under this clause, obtain an initial assessment and immediate pre-approval from the franchisor of the person or persons chosen.
Obviously, since many things can change between the time of pre-approval and the time the franchisee actually withdraws, pre-approval is subject to various conditions designed to assure the franchisor that the designated successor(s) will continue to meet the franchisor's selection criteria during this interval.
Some of these clauses also provide for a form of periodic reassessment of the person(s) covered by the clause, or alternatively, for a pre-approval period at the end of which it must be renewed to remain in force.
Some of these clauses also stipulate a number of other conditions, such as the obligation of the designated successor to work in the franchised business, or to hold an equity interest in it.
Like all other important clauses in a franchise agreement, the designated successor clause must be tailored to the specific characteristics of each franchisor's business sector and operations.
On the other hand, it represents a highly interesting and useful tool for both franchisees and franchisors, who can thus truly plan succession within the network's franchised businesses.
It is even possible, with such a clause, to also stipulate in the contract an obligation for the franchisee to plan his succession to the management and ownership of his business.
Jean H. Gagnon, Ad.E.
Lawyer | Mediator | Arbitrator
