FRANCHISEADVICE
DO FRANCHISE
BUSINESSES DIE WITH THEIR OWNERS?
Manzoor Ishani on how to respectfully navigate a sensitive situation
B
y their nature, franchise agreements are standard form documents to be used for all franchisees throughout the network. There is usually little room for negotiation
between franchisor and prospective franchisee and therefore little scope for amendment. Franchise agreements should therefore be drafted with some care with a view to ensuring that certain foreseeable circumstances are catered for to make the document more acceptable to prospective franchisees. One such circumstance is the death of the franchisee. Prospective franchisees might reasonably want to know what will happen to their business in the event of their death. This has relevance not only for franchisees who trade as sole proprietors or partnerships
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but also for those franchisees who are limited liability companies but are essentially ‘principal driven’ or where the whole of the issued share capital is owned by one person. In these circumstances the question about what is to happen to a business if such a shareholder, or one who has a substantial majority of the shares, dies, is equally important. It is good practice for franchisors to
provide for what is to happen to the franchise business on the death of a franchisee. Clearly it makes good moral and business sense for the franchise business to be preserved on the death of its owner and the franchise agreement should provide for mechanisms to deal with such a situation. It is as much in the interest of the franchisor as it is in the interest of the widow, widower or the beneficiaries of the deceased franchisee to ensure that the business continues.
Over the years, a number of rules have emerged that have become accepted practice and have stood the test of time well. Given that most franchisees are small businesses, there is going to be little resource available to apply towards ensuring the continuance of the business on the death of a franchisee. The contract therefore usually provides for the franchisor to take over the management of the business until matters are sorted out. The cost of this is usually paid for out of the franchised business and this is better than the alternative, which may be for the business to close pending its disposal because, once the business closes, albeit for a short period of time, its value plummets. The ethics of franchising require that the beneficiaries of a deceased franchisee should be able to inherit the business that was in the ownership of the deceased franchisee.
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