Succession Planning for Franchisees

Franchisees need to create a succession plan. It is essential for franchisor and franchisee to cooperate.

Many hard-working franchisees, following the franchisor's business plan, have built their operations into very successful businesses representing a high percentage of their net worth. Because a franchise is a unique asset, however, fashioning a sensible estate plan for a franchise owner is far more difficult than for a sole proprietorship or closely held business. For one thing, a franchisee does not own their business outright; a franchise is only a contract right. Therefore, the franchisor, too, must be a participant in the decision-making process.

Some of the key problems that need to be addressed are:

1. How to deal with the restrictions on transfer imposed by the franchise agreement, yet ensure that the desired transfer takes place, especially in the case of accidental death;
2. How to provide the economic benefit to all heirs, even if control of the franchise cannot be transferred to all; and
3. How to value the franchise for estate tax purposes - an area where considerable information is available to the franchisor but not, usually, the franchisee.

Estates of substantial value are subject to federal and sometimes state estate (also known as “death”) taxes.  Besides ensuring that assets pass according to a decedent’s wishes, an estate plan should also seek ways to minimize the taxes. Another major reason for preparing a succession plan is to avoid a distress sale which would diminish the value of the franchise.

It is essential for the franchisor and franchisee to cooperate in order to achieve the mutually desirable goal of a seamless transfer which maintains the value of the franchise for the franchisee while maintaining the royalty stream and goodwill of the franchise for the franchisor.

Best practices require that a franchisee developing a succession plan contact the franchisor's legal department before going forward and devising an estate or succession plan. Otherwise, the plan developed may appear to do wonders for the franchisee but be unacceptable to the franchisor. For example, some franchisors have very definite antagonisms toward any franchise having more than one owner.

Restrictions are intended to enable franchise systems to enforce their high quality standards and to ensure uniformity within their system. Failure to comply with these restrictions may become cause for termination and expose the franchisee to the risk of losing the value of their unit.

In view of the options available and the technicalities of structuring a succession plan, professional advice is a must.  Future postings will address the use of techniques such as Family Limited Partnerships and other estate planning tools.

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Note to readers:  Bruce will facilitate a roundtable discussion on the subject of succession planning for franchisees at the IFA’s Legal Symposium at the Capital Hilton, Washington, D.C., on Tuesday, May 8, 2007.  For more information about the conference, go to www.franchise.org and click on Events.