New York franchisees interested in succession planning must be made aware of the effect a lifetime transfer of a business has on estate planning.
Transfers without consideration during one’s lifetime are considered gifts under federal and state tax law. From an estate tax perspective, gifts reduce the estate tax threshold of the person making the gift and after death, that person’s estate would have to pay taxes on the amount of the estate that exceeds the estate tax threshold. However, with advanced preparation, a franchisee interested in succession planning can implement a plan to minimize tax burdens.
Franchisees are responsible for finding a buyer when they want to sell their franchises. Succession planning may involve a franchisee identifying a successor such as a family member or key employee. In these circumstances, and depending upon the terms and conditions of the particular franchise agreement, the franchisor may be granted limited time and opportunity to evaluate and approve the buyer or successor.
After approving the transaction, it is advisable for both franchisor and franchisee to work jointly to educate and train the successor in operating a successful franchise. The franchisee should make sure the successor understands the customer base and market area.
Having a franchisor work with its existing franchisees on succession planning, rather than merely reacting to a pending transaction help avoid complications. If, for example, a franchisor has its own succession program, this may be an indication that the franchisor is willing to working with franchisees to their mutual benefit. Any franchise succession plan considers how best to accomplish a transfer in accordance with the franchisor’s requirements. Typically, franchise agreements limit a franchisee’s ability to transfer the franchise and in many instances give the franchisor an option to acquire the franchise. That option, if exercised, would defeat the franchisee’s goals of passing on the franchise to the next generation.
A smart succession plan involves getting the franchisor on board early in the process so that the franchisor can become comfortable with the future operators of the franchise. Proper planning includes grooming successors for management and facilitate relationships between them and the franchisor, creditors, vendors and employees. That planning should start sooner rather than later.
A business operator interested in planning for the next generation would be wise to consult with a knowledgeable attorney early on in the process so that all interested parties undertake a smooth transition.
*Gene Berardelli may be contacted at: GeneBerardelli@ipglegal.com.
Gene is a New York street-smart attorney with an extreme passion for success. Gene specializes in litigation, arbitration and general corporate law for New York-based and international clients. He, also, is the host of a popular New York talk radio program.
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