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.