New York Franchisee Succession Planning

New York franchisees interested in succession planning must be made aware of the effect a lifetime transfer of a business has on estate planning.

Federal & New York Gift Tax Law
Transfers without consideration during one’s lifetime are considered gifts under federal and New York 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 the tax burden of the transaction.

Franchise

Franchisees are, typically, responsible for finding a buyer when they want to sell their franchise. Succession planning may involve a franchisee identifying a successor.  In these circumstances, and depending upon the terms and conditions of the particular franchise agreement, the franchisor may be granted a limited time and a limited opportunity to evaluate and approve the buyer or successor.

Franchise Succession Planning
Having a franchisor work with its existing franchisees on succession planning, rather than merely reacting to a pending transaction helps avoid complications.  If, for example, a franchisor has its own succession program, this may be an indication that the franchisor is willing to work with franchisees to their mutual benefit.

Most franchise succession plans consider 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 franchise attorney early on in the process so that all interested parties undertake a smooth transition.

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