Protection For Franchisees
Buying a franchise is usually treated as buying a job with a system attached, which understates what has been signed.
There is normally borrowing, often with a personal guarantee, and there is an agreement running for a fixed number of years that sets out fees, standards and what the franchisor can do if things go wrong. Those obligations do not depend on you being well.
The useful thing about this stage is that the answers are written down. Most franchisees have simply never read that part of the agreement.
The short answer
A franchisee has usually borrowed to buy the franchise and signed an agreement committing to fees, minimum performance and a fixed term. If illness or death stops you trading, the agreement generally does not simply pause, so the practical questions are what your franchisor can require, whether the franchise can be transferred or sold, and whether there is money to fund either.
What this changes
- You have taken on borrowing to buy the franchise, often personally guaranteed
- Ongoing fees are normally payable whether or not the unit is trading well
- The agreement runs for a fixed term with obligations that continue through illness
- The franchisor usually has a say in any transfer or sale of the franchise
- Your family may not be able to simply take over or sell it without approval
- Any minimum performance requirements still apply while you are not there
The bit people miss
The transfer question is the one that decides everything else and almost nobody has checked it. A franchise is not usually an asset your family can just sell. The agreement normally gives the franchisor rights over who takes it on, which can include approving the buyer, a right of first refusal, or in some cases terminating the agreement rather than permitting a transfer. That means the value your family expects to realise may depend on somebody else's decision. Reading your own agreement is the only way to know which applies, and it is worth doing before you need the answer.
Who Runs It While You Cannot
For a single unit franchisee this is the practical question that matters more than any other, and it has a cost attached.
Most franchise agreements require the unit to keep operating to the franchisor's standards. If you are the manager as well as the owner, being off for three months means either paying somebody to run it or breaching the agreement, and the cost of that cover has to come from somewhere while the unit's performance is probably also suffering.
That is a specific and quantifiable thing to insure, and it is worth sizing cover against it rather than against a vague sense of lost income. Work out what paying a competent manager for six months would cost, add the fees and loan repayments that continue regardless, and you have the figure that actually needs covering.
Read The Termination And Transfer Clauses
Your franchise agreement already answers most of this and it is sitting in a drawer.
The clauses to find are the ones dealing with death, incapacity, transfer and termination. Specifically: can the franchise be transferred, does the franchisor have to approve the buyer, do they have a right of first refusal, and what happens if the unit stops meeting its obligations because you are not there. Some agreements are accommodating about this and provide a sensible process. Others are not.
Whichever yours says, it determines what your family would actually be able to do, and therefore what the cover needs to achieve. If a transfer is realistic, cover needs to keep things running long enough to arrange one. If the agreement can be terminated, the franchise may be worth very little to your family and the borrowing becomes the whole problem. Those are different amounts of cover for different reasons, which is why this starts with reading the contract rather than with a quote.
What usually fits, and why
Usually the first priority. Fees and loan repayments continue while you are ill, and a single unit franchise generally cannot run itself, so an illness creates costs and stops income at the same time.
Sized against the borrowing used to buy the franchise, particularly if you guaranteed it personally, so your family is not left servicing a loan against an asset they may not be able to sell freely.
Pays a lump sum on diagnosis, which can fund management cover for the unit or an orderly exit if you are not going to be able to return to it.
Common questions
What happens to my franchise if I die?+
That depends on your franchise agreement, which normally has specific clauses about death, transfer and termination. Commonly the franchisor has a say in who takes it on, and in some cases can terminate rather than permit a transfer. Reading those clauses is the only way to know your family's actual position.
Can my family sell the franchise?+
Usually only with the franchisor's involvement. Agreements commonly require approval of any buyer and sometimes give the franchisor first refusal. So it is not an asset your family can simply put on the market, which is worth knowing when you work out what they would actually be left with.
Do I still pay fees if I am off sick?+
Normally yes. Franchise fees are generally payable under the agreement regardless of how the unit is performing or whether you are there. That is a large part of why income protection matters for franchisees: the costs continue while your ability to generate income does not.
How much cover do I need?+
A useful way to size it is what it would cost to have somebody competent run the unit for six months, plus the fees and loan repayments that continue anyway. That gives you a real figure based on your actual obligations rather than a guess at lost earnings.
I guaranteed the franchise loan personally. Does that matter?+
Yes, considerably. It means the borrowing can be pursued against you and generally against your estate, separately from whatever happens to the franchise itself. So your family could face the debt while having limited control over the asset it paid for. That combination is worth covering deliberately.
Cover that often goes with this
The gaps we most often find sitting next to this one.