Franchising in Canada: planning for death or incapacity

Buying a franchise often involves a commitment from a family as much as from an entrepreneur. Yet one question is easily overlooked: what will happen to the business if its owner dies or can no longer work? In Canada’s franchise sector, continuity depends in part on the franchise agreement, the ownership structure and estate planning arrangements. Here is how to check that they work together before you buy.

1. Identify what triggers the succession provisions

Do not look only for a section headed ‘death’. Relevant provisions may appear under clauses covering transfers, changes of control, management or default. Ask your lawyer to review them together, along with the schedules and any personal undertakings.

The agreement may distinguish between the death of the owner, the death of the majority shareholder and the incapacity of the designated manager. These events do not necessarily have the same consequences. If a company signs the agreement, it may continue to exist after its shareholder dies, but that does not automatically satisfy the franchisor’s requirements concerning management or control.

Get written clarification of:

• how incapacity is defined and what evidence is required;
• who must notify the franchisor and within what timeframe;
• the consequences of a temporary or prolonged absence;
• the approvals needed to replace the manager;
• any deadlines within which the estate must act.

The aim is to distinguish an interruption to your work from an event that puts the continuation of the agreement at risk. Any vague wording should be clarified before you sign.

2. Separate inheritance, ownership and the right to operate

Leaving shares or assets to someone in your will does not guarantee that they will be able to operate the franchise. The agreement may make a transfer or change of control subject to the franchisor’s approval. An heir may therefore inherit something of financial value without immediately meeting the requirements to run the business.

Ask a practical question: if your spouse or child inherits your stake, can they keep the business by appointing a qualified manager? Or will they have to complete training and obtain approval themselves? Also check whether fees, a new agreement or other conditions could apply.

The legal framework varies by province. In Ontario, the Arthur Wishart Act (Franchise Disclosure), 2000 requires, subject to applicable exemptions, a disclosure document to be provided at least 14 days before a franchise-related agreement is signed or a payment is made. Among other things, this document must set out the transfer conditions and proposed agreements. Use this period to have the succession provisions reviewed, rather than assuming that disclosure guarantees business continuity.

Quebec has no legislation specifically governing franchise disclosure. The general provisions of the Civil Code of Québec apply, including those relating to contracts and succession. Your will is therefore no substitute for a review of the franchise agreement.

3. Put realistic interim management arrangements in place

A succession plan must also make it possible to pay employees, order stock and communicate with the franchisor during the transition. The person who inherits the business will not necessarily be the person who can run it from day one.

Work with your advisers to prepare a brief continuity document setting out:

• the proposed replacement manager and whether they would be acceptable to the franchisor;
• who is legally authorised to act on behalf of the business;
• the steps that need to be taken with the bank;
• where contracts and essential information are securely stored;
• contact details for the advisers who should be notified.

Make a clear distinction between incapacity and death. Powers that can be exercised during your lifetime do not necessarily remain valid after your death. The appropriate legal instruments and the conditions for using them vary by province; have them prepared or checked by a suitably qualified professional.

Then test a simple scenario: you are unavailable for several weeks. Who makes day-to-day decisions? Who can authorise spending? Which approvals are still missing? This exercise will reveal obstacles that a will alone cannot resolve.

4. Cost and co-ordinate the transition

Ask your accountant to assess the specific financial needs of the transition: paying a replacement manager, any training, professional fees and financial commitments that continue during your absence. Also have the position on personal guarantees and debts checked; do not assume what will happen to them.

With a licensed insurance adviser, consider whether life or disability cover could meet some of these needs. Check the beneficiary, exclusions and payment timescales. An insurance payout does not, however, give anyone the right to continue operating the franchise on its own.

Finally, have the franchise agreement, estate planning documents and, where there is more than one owner, the partnership or shareholders’ agreement reviewed together to ensure they are consistent.

Key takeaway: before buying, get clear answers to three questions: who will be able to own the franchise, who will be able to manage it, and what resources will they have? Have those answers checked together, rather than reviewing each document in isolation.