Transferring your interest in a Franchise or Multilevel Marketing Business
Have you ever thought, wouldn’t it be great to own your own McDonald’s® or other franchise? McDonald’s® is a recognizable brand with a well-established business model. You could own your own small business without building it from the ground up. To become a franchise owner, you enter into a contractual agreement with McDonald’s®. You have access to their business model, advertising resources, and products. You would also benefit from their training program and have a mentor to enhance your chances for success. After all, McDonald’s® does not want you to fail if you have their name on your building. There is a significant financial investment required, though, and the cost of being a franchise owner can be relatively high. There are also additional fees and royalty payments required to continue to receive the benefits you get from using the brand name and support. (McDonald’s® is used only as a recognizable name in this example, nothing is to be implied about the company in this discussion)
Another option is a multilevel marketing (MLM) business owner. Maybe you decide to sell a product for a well-established business in your home. You may have been invited to events or parties where a seller advertises and sells a company product. The seller earns money by making sales and by recruiting other sellers. Multilevel marketing businesses may appeal to some because of their flexible schedule and the lack of substantial up-front costs. If you are an extrovert with a large circle of friends and acquaintances and passionate about the product you are selling, multilevel marketing may work for you.
How do you pass these businesses to your heirs?
When you own a small business, you strategically plan to build equity and value in the business. Your business is an asset. Just like any valuable asset, it can be sold or passed on to your beneficiaries through a will or trust. However, if you choose to invest in a franchise or a multilevel marketing business, your interest may not automatically transfer to your beneficiaries as it does with other small businesses. You have a contract with the franchisor or multilevel marketing business. If your beneficiaries do not meet the requirements of these contracts, ownership may be forfeited.
Let’s say your daughter has been working at your McDonald’s® franchise since she was in school. You would like to pass the franchise on to her if you should die or become incapacitated. There may be a strict franchise agreement that states your daughter must apply for the transfer, and McDonald’s® (the franchisor) has the right to approve or reject the transfer. The franchisor may require your daughter to undergo a background check, have a personality test, have her financial statements reviewed, and even pass a verification test that she is not on a terrorist watch list. She will need to agree to the franchisor’s financial and operational criteria, attend any required training, sign a new franchise agreement, and provide a personal guaranty. Merely putting your desire to pass the franchise to your daughter in a will or trust instructions is likely not going to be sufficient to transfer your franchise to your daughter.
What about a multilevel marketing business? Can you pass your interest in that type of business to your daughter? You may have developed a branching network of sellers and have a large group of followers. This investment in people and relationships has value. Your multilevel marketing contract may expressly state that your interest in the business may be inherited as long as it follows guidelines in a trust, will, or state law. However, it may also require that your daughter execute a new, separate agreement, fulfill all the obligations in the contract in the same you would have, and continue abiding by the company policies, supporting the growth of the product, and adding to the network of distributors. If your daughter cannot uphold these obligations, she may lose the right to receive commission payments based on the investment you have made.
Proactive planning for franchise or multilevel marketing businesses can help
It may be helpful to meet with your attorney and review your franchise or multilevel marketing agreement now. Your estate attorney can clarify questions you might have and ensure the business is appropriately incorporated into your estate plan. Proactive planning can allow you to ask the franchisor or multilevel marking business owner questions about the transfer process. The transfer process may not be specified in the contract or even something that has been fully worked out by the franchisor or multilevel marketing business owner.
You may also want to meet with your family members to see if anyone else is interested in the business. A frank discussion can prevent conflicts down the road. Agreements for how the transfer process might ensue can be made in advance, and all interested beneficiaries can take steps to make themselves better candidates to assume the business. Other options include transferring your business interest to a beneficiary during your lifetime or selling the business to someone outside the family.
We can help facilitate this process
You have worked hard over your lifetime to increase the value of your franchise or multilevel marketing business, and you want your beneficiaries to be the recipients of this investment. We can help you evaluate the contract, develop a list of questions for the franchisor or multilevel marketing business, determine both you and your beneficiaries’ rights and obligations, and address how to incorporate your business into your estate plan.