A few years ago I encountered a franchisee who had successfully transferred more than $2 million of business value to his children by taking advantage of available minority discounts in conjunction with depressed goodwill and depressed real estate values — a brilliant estate planning move. The only problem was that he had not received permission from his franchisor as stipulated in the franchise agreement.

Technically, this put him in violation of his franchise agreement. Fortunately, he was able to gain permission after the fact. However, some franchisees are not so lucky. In the absence of gaining preapproval, your franchisor could leverage this situation by requiring you to build new facilities or comply with updated image standards in exchange for permission to transfer stock. Naturally, these concessions can be costly and come at an inopportune time in regards to cash flow and interest rates.

Here are a few suggestions for you to consider as you approach succession planning with your franchisor(s): 

  1. Review your agreement to ensure you fully understand its impact on your succession plan. 
  2. Engage your district/zone manager (or the appropriate franchisor contact) and utilize the strength of your relationship while you are alive to seek approval for ownership transfers and successor approval. The ideal time to obtain approval is when your facilities are compliant with image standards and you are meeting performance expectations such as sales effectiveness, customer satisfaction, etc. 
  3. Gather pertinent estate planning documents such as wills and trusts as it is likely the franchisor will require a review by their legal department before approving any ownership changes. 
  4. Consider having your attorney develop a summary of your proposed ownership transfers which will make it easier for your franchisor to understand your intentions. 

One of the keys to experiencing a smooth transition is to understand and comply with the nuances and requirements of your franchise agreement. Many would argue it is easier to ask for permission than for forgiveness when dealing with a requirement of your franchise agreement. In my humble opinion, it is better to play offense than defense here. Overlooking the franchise agreement when developing your succession plan can place you in violation of your franchise agreement which can have significant consequences, including the derailment of your succession plan! 

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