By: Hannah Zaitlin
Q: I recently retired and am thinking about opening a franchise to stay busy and earn income. I would transfer the business to my children in a few years. What should I consider?
Franchises are a large part of our economy. According to most recent US Census Bureau data, New Hampshire has approximately 4,000 franchisee-operated establishments, generating more than 3 billion dollars in revenue annually and employing nearly 40,000. Franchise opportunities span all retail and service industries, but whether to open a franchised business is a major investment decision that should be made only after considerable due diligence and consultation with trusted advisors.
The franchisor’s Franchise Disclosure Document (FDD) is the lynchpin of this due diligence. The delivery and content of the FDD are required by federal law and Federal Trade Commission regulations. The FDD is aimed at reducing fraud and facilitating informed franchisee decisions, as it provides organizational and financial information relating to the franchisor and also includes a copy and summary of the franchisor’s standard form of franchise agreement. Some states have their own disclosure or registration requirements, and a handful have laws governing the franchisor/franchisee relationship, but New Hampshire is not among them. <
To assess the likelihood of achieving your ultimate goal of transferring ownership and management to your children, a careful review of the franchise agreement’s provisions concerning ownership, transfers, and management is in order at the outset.
Typically, franchise agreements require franchisor consent to transfer ownership and exceptions are not usually provided for transfers to family members. Moreover, franchisors often reserve unilateral discretion to withhold consent or to do so based on delineated factors, such as personal finances or credit history of the transferee.
Franchisors commonly have rights of first refusal, giving a franchisor the right to block a transfer to your children by purchasing your interest at a significantly discounted price. This would result in your forfeiture of franchise without optimizing your return on investment.
The agreement may require that management of daily operations be exercised by an approved individual. Therefore, whether your children possess requisite experience or aptitude are important considerations.
For liability protection purposes, franchisees usually own and operate their franchise through an entity such as a limited liability company. However, the owners or principals will likely have to personally guaranty the franchisee’s obligations. Thus, question whether your children would be in position to bear the risk associated with the guaranty.
Hannah Zaitlin can be reached at hannah.zaitlin@mclane.com.
Know the Law is a bi-weekly column sponsored by The McLane Law Firm.