Survivorship Agreement: What You Must Know
It has been a very long time since I have written an article in which I described your rights under the survivorship provisions contained in every store agreement in Exhibit F. The rights given to you in these provisions are extremely important but, from my experience, all too few storeowners are aware of its significance, or some are not even aware of its existence or simply forgot there was such a thing. So I think it’s time for a review.
Frequently, the equity and goodwill value of one or more stores is one of the largest, if not the largest, asset that a franchisee owns—or possibly second only to the franchisee’s interest in his or her home. It is for this reason that the survivorship provisions should be clearly understood, that the designees should be carefully chosen, and that your choices be reviewed on a periodic basis as your circumstances change.
Essentially, the survivorship provisions give you the opportunity to appoint up to three (3) individuals—in order of preference—that you would want to assume ownership of the store in the event of your death, or if you own the store jointly (one or more individuals or shareholders in the corporation that owns the store) upon the death of all joint owners.
Before I give you a summary of the survivorship right provisions and the processes that occur if the right is ever exercised, it is important that every franchisee understand that the designation of a survivor to your ownership in the store is only one part of an overall estate plan that, at a minimum, should include a Will, a Power of Attorney, a Health Care Proxy and a Living Will (a direction to your doctors if you cannot live without artificial means, i.e. feeding tube, respirator). In the context of accomplishing your wishes as to who should survive to your interests in the store, a Last Will and Testament is the most important and, indeed, essential part of your estate plan.
In every state, there are laws that dictate who will be the beneficiary of your estate in the event that you die without a Will. The only possible exception are assets for which you can legally designate a beneficiary upon your death, such as IRAs, 401Ks, joint bank accounts, insurance policies, and bank or investment accounts which contain a “Transfer on Death” (TOD) designation. All other assets, and most certainly the survivor interest in your store, will be inherited by the person or persons that the laws in your state direct—usually starting with a spouse and children in certain proportions.
If you have a Will, however, you should and must designate the same persons, in the same order of priority, as you do in the store agreement as the survivors to your franchise interests. If you do not, and simply provide “I leave everything to my husband/wife,” the Will will trump the contract designation and your wishes may well be thwarted. You may think that your brother, or kid, or long time employee will succeed to your right to the store, only for that intended beneficiary to be faced with a challenge by another person named in your Will as a general beneficiary or, if no Will, by the person who is entitled to your estate pursuant to state law.
Keep in mind also that all states give certain rights to a spouse who can challenge provisions in your Will that deprive him or her of minimum inheritance rights in your estate. I cannot emphasize enough the importance of having your Will and related documents discussed with, and prepared by, a qualified estate attorney.
Now, how does it work? Upon the triggering of the survivorship rights, SEI will attempt to locate your first designated individual and, if he or she is subsequently found and qualified by SEI, that is the end of the process. If that person cannot be located or does not qualify, in SEI’s sole discretion, then SEI will go on to the next designee and so on. On the acceptance and qualification of a designee by SEI, your estate must then waive any right to sell the store’s goodwill. Obviously, it is important to discuss with your designees whether or not he or she would even want to succeed to your interest, and you would also want to be satisfied that every one of your designees could pass the qualification process.
Additionally, SEI will operate the store for the benefit of the franchisee’s estate until the earlier of thirty (30) days, the sale of the goodwill by your estate, or upon the effective date of a new store agreement between SEI and the accepted designee. During the first thirty (30) day period after death SEI will not, during the period of its operation, charge for an inventory variation, or payroll (including draw) in excess of that incurred during the prior three (3) months. If the store is not sold, or if no designee wishes to assume the operation of the store, SEI will continue to operate the store, for its benefit, for an additional ninety (90) days, to give your estate a further opportunity to sell the franchise. Importantly, if one of your designees does want the store and does pass the qualification process, the then current contract will have to be signed, but no franchise fee will be imposed and there will be no change in the financial terms (7-Eleven charge) from those in your agreement until its expiration.
For sure, the survivorship benefits in your store agreement are valuable, but the language leaves a lot to be desired from a practical point because the time limitations are far too short. We all know that thirty (30) days for your estate to sell your store and have the buyers approved, or have your beneficiary located, qualified, and up and running a 7-Eleven store is just impossible given the snail’s pace of SEI when accomplishing these tasks. Also, probating your Will—or if there is no Will to have an executor appointed, having an administrator appointed—can, in many states, take one hundred and twenty (120) days or more, and the appointment of either one of those representatives is necessary before the store can be transferred to a buyer or to your designees.
The survivorship provisions, unfortunately, do not address these time restraints and contingencies, or the possibility of Will contests or other impediments to permit your estate representative to act quickly. Given these potential problems, one can only hope that SEI will work with your estate to extend the periods of time allotted for a reasonable period in order to effectuate your wishes and the purpose of the contractual survivor benefits afforded to you.
I know that thinking about important necessities like having a Will prepared or buying life insurance, or designating survivors to your interests in one or more of your stores are just not pleasant tasks, but they are essential—so get to it.