Given the expected evolution of the demographic curve, the transfer of ownership and the succession to the management of franchised businesses already represent a significant challenge for many franchisors and will become increasingly so over the next decade.

It is also an inescapable reality. Some franchisees grow old, others become ill, others have accidents, others lose motivation and, finally, others die.

In the medium to long term, all current franchisees in a franchise network will eventually have to be replaced in the ownership and management of their franchised businesses.

The COVID-19 pandemic and the long list of rules, restrictions, forced temporary closures and mandatory health measures that it has brought in its wake will most likely accelerate this issue as a number of franchisees may well more quickly conclude that the time has come for them to make way for a new generation of entrepreneurs.

This is therefore an issue that any serious franchisor wishing to ensure the sustainability of its franchise network should manage proactively, and not on a piecemeal basis by waiting for requests for approval of changes in the ownership or management of its franchisees' businesses to be submitted.

The most experienced and strongest franchisors are already playing a very active role in succession planning and ownership succession of their franchisees' businesses.

Some even initiate themselves such a process with their franchisees when they see a decrease in their level of motivation or in their performance within the franchise network.

Of course, the franchisor must be able to draw the line between, on one hand, proactive management to assist its franchisees in their succession planning, and, on the other hand, undue, and sometimes perilous, interference in its franchisees' businesses.

Some franchisors also offer their franchisees, in collaboration with a financial institution, certain credit facilities to help them finance the transfer of franchised businesses, particularly in favour of key employees who may not already have, on their own, sufficient financial means to acquire them.

Finally, for well-structured franchisors, it will often be useful to develop in-house expertise in this area in order to be able to better intervene with and support their franchisees.

Here are four practical tips for succession planning within a franchise network:

  1. Make your franchisees aware of the importance of a succession plan The importance, for both the franchisee and the franchisor, of a succession plan for the franchisees (even more so for older franchisees) should lead any serious franchisor to offer its franchisees one or more awareness and training programs in this area.
  2. Maintain at all times a bank of franchise candidates Given the challenges that ownership and management succession within its franchisees will inevitably pose over the next few years, a franchisor would be wise to establish a permanent bank of prequalified franchise candidates from which it could, for itself or to support a franchisee looking for a successor, draw when the need arises.
  3. Consider adding a designated successor provision to your franchise agreement In almost all franchise agreements, succession to the management and ownership of a franchised business is governed solely by the sale and assignment provisions, which primarily set out the franchisee's obligation to obtain the franchisor's consent prior to assigning her/his franchised business, or any interest therein, and the criteria, process and steps for obtaining such approval. Under these provisions, a request for approval of a sale or assignment can only be made at the time the franchisee wishes to sell her/his franchised business or her/his interests therein, and not before. This makes it extremely difficult, if not impossible, for a franchisee to plan for succession to the ownership, or even to the management, of her/his franchised business since there is no assurance that the franchisor will accept the person(s) to whom the franchisee would like to transfer her/his business or replace her/his in a management position. At a time when succession and succession planning have become major challenges in franchising, there certainly is room for improvement in that regard. Indeed, several franchisors are now adding to their franchise agreements a "designated successor" provision which provides for the franchisor's advance approval of one or more persons to the management and ownership of the franchised business. In this way, when a franchisee, in her/his succession planning exercise, reaches the stage of selecting the persons to whom she/he will eventually want to transfer the business or entrust its management, she/he may, under this provision, obtain from its franchisor an initial evaluation and immediate preapproval of the person(s) so selected. Of course, since many things may change between the time of such preapproval and the actual withdrawal of the franchisee, such preapproval 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 provisions also provide for a form of periodic re-evaluation of this person or these persons subject to the preapproval or, alternatively, a term at the end of which the preapproval must be renewed in order to remain in effect. Some of these provisions also stipulate a few other conditions, such as, for example, the obligation of the designated successor to work in the franchised business for a minimum period of time or to hold an interest in the franchised business. Like all other important provisions in a franchise agreement, the designated successor provision must be tailored to the particular characteristics of the industry and the unique operation of each franchised network. However, it is a very interesting and useful tool for both the franchisees and the franchisor, who can thus truly plan the succession and succession within the franchised businesses of its network.
  4. Proactively intervene with franchisees who are aging, experiencing health problems, losing motivation or whose performance is declining.

Increasingly, the fields of activity in which franchise networks operate require the flawless performance of each franchised establishment.

 

For a franchisor, this implies that its franchisees must be at the top of their game and fully motivated to be able to meet market requirements and compete successfully.

 

A franchise network can only succeed if it is composed of high-performing franchisees and, in this area as in many others, the chain is only as strong as its weakest link.

 

A franchisor who is concerned about the sustainability and continued performance of its network should therefore proactively intervene with any franchisee whose level of motivation or performance diminishes or no longer allows it to meet the requirements of its market or business in order to openly discuss with the franchisee the situation and the importance of a succession plan so that the franchisee does not lose much by failing to act, quickly and in the right way, to rectify the situation or to find a solution that will allow her/him to reap the full value of the business she/he has often taken many years to build.

 

As mentioned earlier, this is an intervention that requires a certain degree of sensitivity and professionalism since, if done in an untimely or improper manner, it could be perceived as an unfortunate, even illegal, interference in the franchisee's business.

 

However, this risk is much less than the risk of having to deal over the long term with a franchisee whose motivation and performance are declining, which will inevitably negatively affect the franchise network and eventually result in a dispute or an even more difficult situation with the franchisee.

 

Faced with the prospect of an increasing number of franchisees who will want, or need, to pass the torch over the next few years, any serious franchisor should right away consider implementing one or several programs to facilitate the transition of the ownership of its franchised businesses.

Fasken has all the experience and resources necessary to help you better manage your franchise network, achieve your goals and take advantage of opportunities, as well as to draft complete and appropriate agreements that protect your rights while avoiding potential pitfalls.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.