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The “designated successor” clause: a valuable tool for better succession planning

Reading Time 3 minute read

For some franchise networks, franchisees' succession is a major challenge, and, in some cases, is becoming increasingly pressing.

In the short term, this challenge arises mainly in mature networks, but it will eventually affect all franchisors, since, obviously, no one is immune to aging or illness.

How could you use your franchise agreement to better manage this fact of life, which is even more certain than death (since the large majority of franchisees in a network retire long before they die)?

In almost all franchise agreements, this eventuality is addressed only by incorporating sale and transfer clauses. These clauses are designed primarily to compel franchisees to obtain the franchisor's consent before transferring their franchised business or a share in it.

Under these clauses, requests to approve a sale or transfer may be made only at the time when franchisees want to transfer their interests, and not before.

This makes it extremely difficult, if not impossible, for franchisees to plan for who will succeed them as owners, or even as managers, of their franchised business, since the contract offers them no assurance whatsoever that the franchisor will agree to the person or persons to whom they would like to transfer their business or whom they want to appoint to manage it.

In an era when succession planning has become a major challenge in the franchise world, is it possible to do better?

In fact, some franchisors are starting to add a "designated successor" clause to their franchise agreements that provides for advance approval by the franchisor of a person or persons for both management and ownership of the franchised business.

That way, when franchisees do their succession planning and reach the stage of choosing the persons to whom they want to eventually transfer their business or whom they want to manage it, they can get an initial assessment and immediate pre‑approval by their franchisor of the person or persons chosen.

Obviously, since things may change between the point when pre‑approval is given and the point when a franchisor actually retires, this pre‑approval is subject to various conditions that provide the franchisor with assurance that the designated successor or successors continue to meet the franchisor's selection criteria during the intervening time.

Some of these clauses also provide for a form of periodic reassessment of the person or persons named, or, alternatively, an end date for the pre‑approval, after which it must be renewed in order to remain in effect.

Others also stipulate certain other conditions, such as a requirement that the designated successor work in the franchised business or hold a stake in it.

Like all the other important clauses in a franchise agreement, the designated successor clause must be tailored to fit the specific characteristics of the industry and of each franchisor's own operations.

It is a very valuable and useful tool, however, as well for a franchisee as for its franchisor, who can both use it to do real succession planning for the franchised businesses in the network.

It is also even possible to use this kind of clause to stipulate in the contract that the franchisee has an obligation to do both management and ownership succession planning.

Fasken has all the expertise and resources that are needed to help you draft practical, useful agreements and to ensure that they are and continue to be genuinely tailored to meet your needs.


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