Death and disability are two events that can occur whilst you are operating a franchise. It is always recommended that a franchise solicitor draft a clause that anticipates the death or disability of either party into the Agreement. What will you do if you sustain a life-threatening injury with 6 years left to operate the franchise? This situation, whilst unlikely, is completely feasible and should be seriously considered by you and your franchise solicitor.

3 Examples of ‘Death and Disability’ clause

There are a number of ways in which a franchise solicitor can draft this into the franchise agreement. However, it is crucial that the clause be reasonable, otherwise it may be deemed to be unfair and, therefore, invalid.

  • Termination – It is not unheard of that a death and disability clause can suggest termination of the entire agreement in either of these circumstances. This is not favourable to a franchisee’s spouse or children. In this regard, it is advised that you should seek legal advice so that the clause can be re-drafted.
  • Sale of Assets – Alternatively, a franchise solicitor may draft into the franchise agreement a clause that provides for the sale of any assets of the franchised outlet to the franchisor. This occurs by agreed method, which will determine the combined value, and transfer of any profit to the family of the deceased franchisee.
  • Perpetual Succession – The final and arguably most favourable way of drafting the death and disability clause is to have the franchise solicitor include an option. This option will authorize the spouse or any adult children to take over from the previous franchisee and carry on the operations of the business. If no family member wishes to continue operating the franchise, then the family of the deceased franchisee may sell the franchise business to a new prospective franchisee. Of course, the franchisor may still be entitled to a first right of refusal to buy back the business, however, this will largely depend on how the clause has been drafted.

Conclusion

Another good tip is for the death and disability clause to include a method for valuation of the franchise business assets. This could occur through already predetermined formula, current market valuations or by using a third party that conducts valuations. In addition, the franchise solicitor should adequately define disability so that the scope of ‘permanent’ disabilities is clearly explained.

For more information regarding the death and disability clause of a franchise agreement, contact LegalVision on 1300 544 755 and speak with an experienced franchise solicitor.

 

Lachlan McKnight

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