Franchise Succession Planning: Considerations for Franchisors and Franchisees

As a business owner, building a successful franchise network can take years. However, having a succession plan ensures that everything you’ve built is protected and secure. Franchise succession planning often involves more than anticipating death or retirement. Often, franchise succession planning will consider cases where the franchisor becomes disabled, has a dispute with a business partner or reaches the end of their franchise agreement. This article will discuss some key considerations franchisors and franchisees must make when franchise succession planning. 

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Asking The Right Questions

Firstly, you should consider the size of the franchise network to determine how many roles you must fill. Large franchise networks have several moving parts. Often, there is a wealth of talent already working in various capacities within the network. Although, a smaller franchise network faces obstacles, and no one can assume a successor is capable of running the business.

It is essential to think ahead when you visualize your business at its peak. For instance, will the current economic landscape impact your business in the foreseeable future? Consider your options if the business is operating at its best. Are the systems and processes of your particular franchise well-defined and resilient?

Another important consideration you should discuss with your lawyer is the time it may take to sell the franchise upon retirement. Consider which skills and attributes enable you to perform so well. Additionally, you might think about who is most suited to fill your shoes and take over the role.

Planning In Advance

Various aspects of the franchise network offer insights into what’s required for effective succession planning. For instance, the franchise network’s executives indicate the company’s existing competencies concerning leadership needs and the industry in which it competes. This rolls over to the employees, who are evaluated and assessed to determine how they match the business’s current needs. Additionally, employees receive consistent training and mentoring to match personnel recruitments and future needs. Finally, you must have efficient management and human resources programs in place. This provides visibility across the business.

When you retire, it is pretty common for family disputes to arise. This is because the day-to-day operations of the business and the rights to business earnings become contentious. For example, in a partnership, each party must agree on how each partner may exit the partnership. This process ensures fairness, so the same rules apply to each partner. Usually, the Partnership Agreement will cover these details. 

As a franchisee, you should consider the future in case something happens and you can no longer operate the franchise.

The Franchise Agreement

A lot of the time, franchise agreements will specify the time restrictions that a franchisee is permitted to be away from the franchise business. In addition, the time restriction will usually detail the time limits for a replacement to operate the franchise in the franchisee’s absence. 

Franchisees are also limited in their capacity to affect the sale of the franchised outlet. To ensure that the system provides the most protection, franchisors usually have the first right to purchase (or buy back) the business. Further, they have a reserved right to approve or disapprove the prospective franchisee.

Moreover, the franchisor may want to: 

• look over the proposed contract of sale; 
• revise the transfer of the interest in the franchise; and 
• approve any prospective incoming franchisees.

It will be necessary to the franchisor that whoever does take over the business is trained before any such transfer occurs.

Likewise, any internal restructuring will mean that the franchisee must comply with the clauses in the franchise agreement. This might include clauses relating to unforeseen events or an important employee unable to continue working because of an illness or death.

What to Consider Next

There are several key considerations when planning your post-franchise commitments. This includes:

• obtaining legal and financial advice;
• assessing your responsibility in the franchise business;
• choosing a successor, which can either be a family member or an outstanding manager who has the skills and drive to lead the business, and organizing training for the potential transferee;
• guaranteeing the satisfaction of preconditions to transfer found in the franchise agreement; and
• being able to proceed with the franchise sale in a short time frame.

Key Takeaways

As a franchise owner, it is crucial to think ahead. Unfortunately, there is no sure way of knowing what issues your business will face. However, having a franchise succession plan ensures that everything you’ve built is protected and secure. Some key considerations franchisors and franchisees should make include:

• the size of the franchise network;
• the time it may take to sell the franchise;
• the company’s existing competencies concerning leadership needs and industry competition; 
• terms under the franchise agreement (for instance, time restrictions); and
• post-franchise commitments, including choosing a successor.

If you need assistance or legal advice concerning franchise succession planning, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

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