A Primer for Succession Planning for Franchisees

A List of Essential Documents Needed in Preparing a Succession Plan

There are many key questions which must be addressed in creating a succession plan for a franchisee: Who is available for taking over the unit? Are they family? Are they available and qualified? Will a transfer now trigger the renewal process? How does one determine the fair market value of the franchise? And, is it better to sell the business before or after the death of the owner?

Once those questions are answered a franchisee must figure out how to implement the plan they adopt. Here is a list of some essential documents needed:

• Buy-Sell Agreement – outlines terms between the parties who own the franchise. Determines what happens in the event of the three Ds: death, disability and disaffection
• Will – should be a pour-over will if using a living (revocable) trust as the primary dispositive instrument.
• Living/Revocable Trust – should be the main succession planning instrument to avoid probate and delays.
• Durable Power of Attorney – sometimes called “living will” determines who makes extraordinary life support decisions.
• HIPAA Authorization – a form necessary to authorize health care providers to release the information needed by the holders of a Durable Power of Attorney in order to make decisions.
• Irrevocable Trust – sometimes called ILIT (Irrevocable Life Insurance Trust), should be used as the owner and applicant for life insurance used for wealth preservation (i.e. to pay estate taxes). If used properly the proceeds will escape both income and estate taxation.
• Family Limited Partnership (FLP) – should be used to take advantage of valuation discounts (e.g. for minority interest and lack of marketability, franchisor’s right of first refusal) as part of a succession plan to reduce estate taxes.

Of course, any franchisee putting together a succession plan must start with an agreement with the franchisor; without such consent all other documents, no matter how well-drafted or well-intentioned, may be meaningless.

Bruce S. Schaeffer
Franchise Valuations, Ltd.