Franchise and multilevel marketing (MLM) businesses offer people the chance to start a small business with a well-known, established brand. But the owners of these businesses face unique estate planning challenges because their rights and obligations are spelled out in contractual agreements.
What Is a Franchise?
When you purchase a franchise, you are purchasing a unit from an already-established company. You are entitled to use the company’s business model, advertising resources, and products, and you receive training and ongoing support from the company to enhance your chances for success. In return, you agree to adhere to certain business practices and standards. The franchise purchase cost can be high, and you’ll need to pay ongoing fees and royalty payments for the use of the brand name.
What Is an MLM Business?
In an MLM business, you receive and sell products provided by the company and you use the company’s advertising materials to promote them. You earn money by selling the company’s products and recruiting other sellers whose sales provide you with additional income. MLM businesses usually offer flexible schedules and low initial costs, though the company may require a minimum monthly purchase of products. Those who are extroverted and have access to a large network of acquaintances are more likely to succeed since business owners need to present products and recruit team members.
How Do These Businesses Affect My Estate Planning?
An interest in an MLM or franchise business may not automatically transfer to your beneficiaries, even if you include it in your will or trust. If your business is permitted to be transferred, it may be forfeited if your beneficiaries do not meet certain contractual requirements. This is because the transfer is governed by the agreement you entered into with the franchisor or MLM company and these agreements can be strict.
For example, the person to whom the franchise may be transferred must typically apply for the transfer, and the franchisor usually has the right to approve or reject the transfer application. Before granting approval, the franchisor will conduct background checks and personality tests, review financial statements, and check criminal records. The transferee must often agree to meet certain financial and operational criteria, attend required training, sign a new franchise agreement, and provide a personal guaranty. Simply including a franchise business interest may not accomplish a successful transfer of ownership.
An MLM contract may also state that the MLM interest may not be inherited by an individual or trust pursuant to a will, trust, or state law. It may further state that the person who inherits the business interest must execute a new, separate agreement, fulfill all of the obligations under the contract, and abide by all of the company’s policies. If the beneficiary fails to do so, even immediately, they may forfeit the right to receive commission payments based upon your years of work for the MLM company.
Review Your Agreement
Carefully review your agreement to learn the contractual requirements for transferring your interest. It may be helpful to have your attorney review and discuss it with you. In addition, provide a copy of the agreement to your estate planning attorney, so the transfer of your business interest can be incorporated into your estate plan. It is not uncommon to discover that your MLM business has not addressed these issues in its contract. In that case, you may need to encourage corporate leaders to create a company policy addressing end-of-life or incapacity issues.
Have a Family Meeting
A family meeting can help you to determine your loved ones’ level of interest and prevent conflicts after you pass away. Interested beneficiaries must likely take certain steps to facilitate the transfer pursuant to the agreement, so you should educate and prepare those beneficiaries in advance to maximize their chances of becoming a successful transferee. Alternatively, you may consider transferring the business interest during your lifetime or choosing another MLM distributor or franchisee to purchase your interest at your death if allowed by the terms of your contract.
We Are Here to Help
Familiarize yourself with any provisions in your contract affecting your ability to transfer your interest to your beneficiaries and provide a copy of the agreement to your estate planning attorney. We can help you determine your rights and obligations and the best way to address your business interest in your estate plan. Please contact us to set up a consultation. We are happy to meet with you by phone or video conference if you prefer.
You can use the link below to schedule a call with Gabriel Katzner, or just call us at 855.528.9637 to learn more about how best to plan today to protect those most important to you