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Safeguarding your family’s future

Written by Nicola Broadhurst, Julie Howard on Wednesday, 10 February 2021. Posted in Legal

Solicitors Julie Howard and Nicola Broadhurst join forces to explain how franchisees can protect their businesses in the event of death or incapacity.

Safeguarding your family’s future

Solicitors Julie Howard and Nicola Broadhurst join forces to explain how franchisees can protect their businesses in the event of death or incapacity.

Protecting a business has always been a top priority for owners but the uncertainty created by the on-going Covid-19 pandemic has only served to focus the minds even more. Having succession arrangements in place to address the risk of death, or even incapacity, is a key part of any protection strategy.  If either of these two events were to occur, it could have a seriously negative impact on a business. This is all the more pertinent when it involves a franchise, where continuity of business and standards is the key to protecting the brand. 

Franchisors will need to maintain an element of control over how a franchised business is handled in the event of a death (or incapacity) of a franchisee. Franchisees are usually an individual sole trader but sometimes the franchise is owned by a company which has a managing director or a major shareholder running the business day-to-day. Equally a franchisee, who may have built up a successful business, would wish to ensure that this investment is not lost in the event of their death or incapacity.

There should always be an opportunity for the value to be passed on to, or realised by, his or her beneficiaries, or relatives. This is one area that distinguishes franchise agreements from other commercial contracts. Typically, the latter fails to make any provision, other than termination, for death. Sometimes ‘incapacity’ is not even mentioned in contracts.

However, despite being sensitive subjects, it is always best to address such possibilities at the outset of any contractual relationship. It should never be ignored. Appropriate planning upfront can save a lot of heartache and administrative difficulties later on. 

Most franchise agreements usually contain provisions which stipulate how long a period – from date of incapacity or death of the franchisee – their personal representative has in which to nominate a beneficiary to take over the running of the business or ultimately sell it on. In the meantime, the franchisor reserves the right to appoint a manger to run the business at the cost of the franchisee. 

Time periods vary, but representatives usually have around 12 weeks in which to nominate a beneficiary to take over. Representatives may also be given as long as six months in which to sell the business, after which the franchisor is entitled to terminate the agreement and buy back the franchise. 

However, the price a franchisor is willing to pay in such circumstances is often discounted and does not represent the full market value. Such clauses have become industry standard but, in practice, do not always provide a ready solution, particularly in the event of incapacity.

Incapacity

Very often a franchisor can only act when the franchisee or sole director has been incapacitated for a certain length of time – perhaps even as long as 80 days. This can be frustrating for a franchisor, particularly when it becomes obvious that incapacity is likely to last a long time. They are often left ‘kicking their heels’, waiting for the moment when they can step in and act.

This could effectively end up frustrating a potential purchaser, because no one is permitted to complete the deal and sign-off an agreement – until an allotted time period has elapsed. However, it is possible for protections to be arranged – outside of the franchise agreement – which would help all parties should the franchisee lose capacity as a result of suffering a stroke, dementia or a brain injury. These are particularly relevant when the franchise model is service-based and dependent upon the franchisee being hands-on.

When a sole director or sole trader loses capacity, typically their business accounts are frozen. In order to avoid substantial disruption to the business, a Lasting Power of Attorney (LPA) can be arranged. This covers business assets and can be designated when the franchise agreement is signed. An LPA is a document which allows the franchisee to nominate an attorney – which can be a family member, trusted friend or business associate – who will make decisions on your behalf, if you’re not able to. An attorney must always act in your best interests. 

An LPA for business assets needs to be drafted with care and is not simply an ‘off the shelf’ document.   It is possible for the franchisee to appoint the franchisor as their attorney, and an LPA can nominate more than one person to make management decisions on behalf of the business. However, LPAs should only apply to the franchised business, and does not include any other financial assets belonging to the franchisee.

LPAs are registered with the Office of Public Guardian and gives permission for the attorney to act if and when the franchisee loses mental capacity – and not before. Provisions within an LPA may disclose that a qualified doctor will decide if the franchisee is unable to run their own business, through incapacity. 

It is also possible for the franchisee to be mentally capable, but still not physically able to run the business, and this too can be stipulated within an LPA. This could be helpful if the franchisee is recovering from an illness or is in hospital. If this were to happen, the appointed attorney would be required to become involved in any decision-making process.

An LPA can also stipulate the exact powers to be afforded to an attorney who may not be given ‘carte blanche’ over all aspects of the business. Certain instructions will be binding, while others are not – but merely act as advice or to highlight preferences. Having an LPA would also assist the franchisor who may wish to sell the business, on behalf of the franchisee.  All franchisees should consider taking out critical health insurance. This would provide additional financial protection in the event of suffering permanent incapacity.

Death

The franchisee needs to put in place adequate arrangements concerning their business should they pass away. It is, after all, part of his or her estate. We would recommend that the franchisee writes a Will with instructions for who takes over the business following their death. This, obviously, would need to dovetail with provisions laid out in the franchise agreement. Before any nominated person can take control of a business, the franchisor would need to give their approval and this may depend on the named-person undergoing a period of training.

This is where it becomes a little complicated and is a section within the agreement which needs to be unambiguous. It would be helpful, for example, for the personal representative(s) to have the power to enter into arrangements for selling the business to another prospective franchisee or, alternatively, selling it back to the franchisor.  

If the franchisor is keen to buy back the business, serious thought should be given to how this might be funded. It may be possible to obtain insurance to cover any shortfall between an open market value and the price the franchisor is prepared to pay under the terms of the franchise agreement.  

Too often this is overlooked. Yet it could easily be addressed before any franchise agreement is signed. With some practical measures in place, this would help to streamline the process and provide additional financial protection for the franchisee and their family.

About the Author

Nicola Broadhurst

Nicola Broadhurst

Nicola is head of the franchising and retail practice at Stevens & Bolton. She is an acknowledged legal expert in the franchise sector, providing the full range of advice to franchisors and franchisees. Nicola also regularly advises clients on their choice of expansion method including template agreements to help standardise relationships, customer services issues and advertising and marketing compliance.
Julie Howard

Julie Howard

Julie is a private client tax lawyer and provides technical support to the private client team.

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