Estate Planning for Franchise and Multilevel Marketing Business Owners
Franchise and multilevel marketing (MLM) businesses are often attractive because they offer people the chance to start a small business with a well-known brand and an established business model. However, they present different estate planning challenges than other types of small businesses because the rights and obligations of franchisees and multilevel marketers are spelled out in contractual agreements.
What Is a Franchise?
When you purchase a franchise, you are purchasing a unit from a company that is already established in a particular industry. As a franchisee, you are entitled to use the company’s business model, advertising resources, and products, and receive training and ongoing support from the company to enhance your chances for success. In return, you must adhere to specified business practices and standards. The cost of purchasing the franchise can be quite high, and there are typically also ongoing fees for support and royalty payments for the use of the brand name.
What Is an MLM Business?
In an MLM business, you benefit from having established products to sell and the use of 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 do not require substantial initial costs, though the company may require a minimum monthly purchase of products. Those who have a large network of friends and acquaintances and are friendly and extroverted are more likely to succeed, as MLM businesses involve presentations of products to generate sales.
How Do These Business Types Impact My Estate Planning?
Unlike many other types of money and property you own, 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. Further, if it is permitted to be transferred, it may be forfeited if your beneficiaries fail to meet certain contractual requirements. This is because the transfer of those interests is governed by the terms of the agreement you entered into with the franchisor or MLM company.
A franchise agreement typically imposes strict requirements on the transfer of a franchise business. For example, the person to whom the franchise may be transferred must apply for the transfer, and the franchisor (the person who sells the right to open and operate a franchise to another) usually has the right to approve or reject the transfer. Prior to granting approval, the franchisor will conduct background checks and personality tests, review financial statements, and even check if the transfer applicant is on the terrorist watch list. The proposed transferee must often agree to meet certain financial and operational criteria, attend required training, sign a new franchise agreement, and provide a personal guaranty. Thus, simply including a franchise business interest in your will or trust is likely insufficient to accomplish a transfer of your business interest to your beneficiaries.
MLM agreements may impose other requirements that could prevent your beneficiaries from receiving what you intend. An MLM contract may specifically state that the MLM interest may be inherited by an individual or trust pursuant to a will, trust, or state law. However, it may further state that the person who inherits the business interest must execute a new, separate agreement, fulfill all of the obligations under your contract, and abide by all of the company’s policies by promoting and supporting the product and motivating and training other distributors. If the beneficiary fails to do so, even immediately, the beneficiary may forfeit the right to receive commission payments based upon your years of work for the MLM company.
Review Your Agreement
If you have not done so already, 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 to avoid any misunderstanding about your rights and obligations. In addition, provide a copy of the agreement to your estate planning attorney, so any desired transfer of your business interest can be incorporated into your estate plan. It is not uncommon to discover that the MLM business in which you have an interest has not addressed these issues in its contract. If that is the case, you may need to work with the organization’s leaders to encourage the creation of a company policy dealing with these end-of-life or incapacity issues.
Have a Family Meeting
If you are not sure if any of your children or family members are interested in taking over your business, a family meeting will help you to determine their level of interest and prevent conflicts after you pass away. In addition, interested beneficiaries must likely take certain steps to facilitate the transfer pursuant to the agreement; therefore, 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 business contract.
We Are Here to Help
If you have an interest in an MLM business or franchise, it is crucial to familiarize yourself with any provisions in the contract affecting your ability to transfer your interest to your beneficiaries, and a copy of the agreement should be provided to your estate planning attorney. We can help you determine your rights and obligations under the agreement and the best way to address your business interest in your estate plan. Please call us today at 818-285-2850 to set up a consultation. We are happy to meet with you by phone or video conference if you prefer.