What will happen to my franchise if I can't manage it?

You own a franchise and are operating it successfully. Everything is running smoothly until one day you become ill or you have a dispute with your partner. How do you and your business get through this turmoil and survive? You may need to take a break from work for a while and what happens to your franchise in the event of personal adversity will really depend on the terms in your franchise agreement.

The Franchising Code of Conduct is silent on what happens if a franchisee is unable to operate its business due to unfortunate personal circumstances but most franchise agreements will set out the process. It is quite common to find clauses in franchise agreements whereby the franchisor has the ability to take over the management of the franchise for a certain period of time if the franchisee dies, is no longer capable of effectively managing the business or is unable to devote their whole time and attention to the business.

In such cases, the franchisor may appoint their own manager to occupy the premises and make all such management decisions as the franchisor reasonably considers are in the best interests of the franchise. These decisions may include the termination of employment of your (most valued) employees, recruitment of new employees, and the servicing, upgrading or purchasing of equipment and supplies.

Undoubtedly franchisors will use their best efforts to operate your business to ensure that the image and reputation of the franchise and of the overall networR is protected and preserved. That said, a franchisor will not normally invest as much time, attention and energy as an owner-operator of a franchise.

Profits of the franchise may lessen considerably at this time, particularly as most franchise agreements provide franchisors with the ability to deduct all their expenses incurred as a result of managing the business on behalf of the franchisee, including payment of a management fee. This may also affect the resale value of your business if you choose to sell the franchise during this period. You can only hope that the franchisor operates the business so there is enough money left over for you, after deducting the franchisor's expenses and other outgoings of the franchise, such as rent.

It is also important to pay particular attention to other clauses commonly found in franchise agreements requiring a franchisee to pays to the franchisor any losses generated by the franchise while it is being managed by the franchisor and to release the franchisor from any liability for loss and damage incurred by the franchisee while the franchise is being managed and operated by the franchisor. A franchisee could face significant financial loss if the franchise's financial affairs not being managed properly by the franchisor. For franchisees who lease business premises, you may also face potential legal action by a landlord if your rental payments are in arrears.

What happens if you are ill, your condition is worsening and you are unable to return towork in the near future? A desirable clause in your! franchise agreement is a provision to find a replacement principal to manage and operate your business while you are unable. This person could be a family member or trusted close friend. A franchisor is likely to insist that this principal be approved by them. If you are unable to find a replacement principal within a specific time then the franchisor may, at its option, terminate the franchise agreement.

It is important that you think about the implications and it may be prudent to take income protection insurance. If you are a I prospective franchisee, ensure that any franchise agreement gives you the ability to find a replacement operator to manage your business while you are unable. At the end of the day, if your franchisor is willing to help you, you can make it through just about anything.

By Tony Garrisson - Principal in the franchising division of Mason Sier Turnbull

This article appears courtesy of Franchising Magazine