Written by Michael Weinberger. Michael is the Lead Attorney at MLM Canada. He is committed to helping direct sales companies grow and expand in Canada, offering peace of mind, and business focused legal solutions in simple English. Michael also happens to speak French, Spanish and German, for his international clients.
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As North Americans and baby-boomers mature, many long-time participants are beginning to ask an important question: what happens to their business, downline, or compensation plan position when someone is ready to retire?
For some participants, the goal may be to sell their position and realize the value they have built over many years. Others may wish to transfer their position to a spouse, child, or trusted business partner. As this trend continues, direct selling companies should consider whether their policies and procedures are equipped to handle these requests fairly, consistently, and legally.
Like most legal matters, the answer is rarely as simple as “yes” or “no.” The transferability of a position often depends on a combination of corporate structure, contractual rights, company policies, and broader business considerations. Here’s a quick guide to make sure you land on your feet when considering transfers:
Where to start?
One of the first questions a direct selling company should ask is: who actually owns the position?
Some participants operate as individuals, while others may carry on business through a corporation, partnership, or limited liability company. This distinction matters because each entity type may have its own governing agreements and legal restrictions.
For example, if a distributorship is held by a corporation, there may already be a shareholders’ agreement that governs how ownership interests can be transferred. Partnerships may have partnership agreements restricting assignments or requiring consent from other partners. LLCs and other entities may also contain internal provisions dealing with succession planning or ownership changes.
In other words, the direct selling company is not always dealing solely with its own policies. There may be additional contractual layers that affect the transaction.
Companies should therefore ensure they understand the legal make up of the participant before approving any transfer.
Have You Reviewed Your Policies and Procedures Carefully?
Many direct selling companies already have provisions dealing with transfers, assignments, inheritance, divorce, or succession. However, those provisions are often outdated, vague, or silent on key issues.
Companies should carefully review their policies and procedures to determine:
- Whether transfers are permitted at all;
- Whether company consent is required;
- Whether consent can be withheld;
- Whether there is a transfer for free, or for a fee;
- Does the company have a right of first refusal;
- Whether there is a formal application process;
- Whether certain conditions must be satisfied before approval; and
- Whether different rules apply to gifts, sales, inheritances, or corporate reorganizations.
Some companies allow transfers freely. Others prohibit them entirely. Many fall somewhere in the middle by allowing transfers subject to approval.
Where consent is required, companies should consider whether the agreement gives them absolute discretion or whether consent must be exercised reasonably. Poorly drafted clauses can create disputes later, particularly where participants believe they have built a valuable business asset they can go on and sell.
Clarity is critical. Ambiguous transfer provisions can lead to inconsistent decisions, allegations of unfair treatment, and potential legal exposure.
Who Are You? Incoming Participant Matters
A transfer is not simply an administrative exercise. Direct selling companies should also think carefully about who will become the new participant.
For example, is the incoming individual already associated with another downline? Does the transfer create conflicts within the compensation plan? Could it affect genealogy structures or commission calculations?
Companies should also ask whether the incoming participant understands the nature of the business. Running a successful direct selling organization often requires active leadership, training, recruitment, customer support, and team management. As we all know, direct selling is not a passive investment vehicle… it takes work!
A participant may have built a large organization over many years through significant personal relationships and ongoing effort. A company may therefore wish to assess whether the proposed transferee is capable of operating the business in a compliant and productive manner.
Some organizations implement vetting procedures, onboarding requirements, or mandatory training before approving transfers. These safeguards can help preserve network stability and protect the broader participant base. It also helps to have the outgoing participant take part in this transition, to preserve downlines, and company goodwill.
Restrictive Covenants and Competitive Concerns
Another important consideration is whether the outgoing participant should remain subject to certain restrictions after the transfer.
For example, if a participant sells their position and immediately joins a competing direct selling company, the purchaser and the company may both face significant disruption. As a result, some organizations consider restrictive covenants such as non-solicitation or non-competition clauses in connection with transfers.
However, these clauses require careful legal drafting, especially considering putting these restrictions may lead a court to find an independent distributor as an employee. A lot of caution is needed here, and careful legal drafting is a must.
The goal should not simply be to impose restrictions, but rather to create reasonable safeguards that protect legitimate business interests while remaining legally defensible.
Best Practices for Direct Selling Companies
As participant demographics evolve, transfer requests becoming increasingly common. Companies that fail to address the issue proactively may find themselves navigating disputes without clear contractual guidance.
A strong starting point is to review existing policies and procedures with legal counsel. If you have an international company, make sure to engage local counsel, as each jurisdiction may differ. Companies should assess whether their current policies and procedures to make sure they reflect their level of control over transfers. Ask yourself, is the process clear, fair, and operationally practical?
In my opinion, there is an important balance to strike. Participants should feel that they are treated consistently and transparently. At the same time, companies have legitimate interests in protecting compensation structures, maintaining compliance standards, and preserving organizational stability. Therefore, as a fair balance, I think companies should be able to withhold consent, but not unreasonably. Withholding consent for no reason builds ill-will, and nobody wants to work with arbitrary partners.
Ultimately, well-drafted transfer policies benefit everyone involved. They provide clarity for participants planning retirement or succession, while also giving companies the safeguards necessary to manage risk and maintain the integrity of their business.
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