What You Should Know about Leaving Your Franchise to Your Children

By Michael H. Seid, Joyce Mazero

Little Johnny has swept the floors at your franchise since the broom was taller than he was. Little Jane has stuffed marketing coupons into envelopes since before she could write a complete sentence. Sound familiar? It should. Your co-author Michael Seid began to work in his family’s business packing shelves and learning the trade before starting first grade and the family store was like his second home. His experience is not at all unusual.

Have you given any thought to your children not just as helping hands but as potential successors to your business? Growing numbers of franchisees have that very mindset and take steps to create estate plans based on a franchise relationship that will be passed down to a franchisee’s children and heirs.

Children who have worked hard, love the business, and have helped build value may be ideal successors to your business and may be attractive as franchisees to your franchisor. Like any parent, many franchisees probably think that their kids can do anything. But keep in mind that because your business is part of a franchise system, your franchisor will need to feel the same way about your kids if your children are to assume your role.

Franchisors normally reserve the right to approve a transfer of ownership — even to family members. If an owner dies or becomes permanently disabled, some franchisors allow assignment of the franchise to a spouse or heirs without prior approval. More typically, franchisors require approval of the proposed successor franchisee within a certain time period, usually within 6–12 months. Some franchisors waive the transfer fee for these transfers.

Next-generation approval criteria are generally not described in the FDD or franchise agreement, so you should inquire in advance about the franchisor’s requirements to approve a transfer upon your death or disability.

Gradually acclimating a son or daughter to the franchisor may also help. Take the child, at an appropriate age, to franchise conventions and training, for example. Many franchisors have developed “next gen” programs for the children of franchisees. Talk to your franchisor about its next gen program. If you’re thinking of transferring your business to the kids, it likely is a good idea to enter them into the program early.

Smoothly passing a family business upon your retirement or death requires planning. Don’t assume that the franchise will be part of your estate. You need to discuss this with your franchisor and examine it with a qualified franchise lawyer and accountant. Know your rights. Ask a few questions:

  • What are your rights to transfer the business?
  • Are your children and spouse acceptable to the franchisor?
  • What are the criteria for the franchisor to approve the transfer, and can you get approval in advance?
  • Does the franchisor have a next gen program?
  • How much time remains in the initial and renewal terms of the franchise agreement?
  • What form of agreement will you be able to transfer — a full new agreement or something less? If it’s a new agreement, what are the changes from your current agreement?
  • What renewal options are available? Who has to execute them to get the most benefit?
  • Does the franchisor have a right of first refusal to buy the business if you try to transfer it, and will the franchisor waive those rights in advance?

It bears repeating that transferring a family business has serious financial, legal, and tax consequences. Before handing over the reins, you will need to develop an estate plan, which includes the current fair-market value of the business, and a succession plan.

Consult with accountants, estate attorneys, investment advisors, insurance agents, and family business consultants. The franchisor may offer succession-planning advice. Nationwide, about 100 family business centers affiliated with universities provide education on family business topics. For programs near you, ask your lawyer or contact the IFA’s Franchise Education and Research Foundation.

Letting go of control of your business is often difficult for many to accept. Upon succession, your children will likely still have to go through training and learn from their own mistakes.