|Copyright:||(c) 2011 International Franchise Association|
Succession or exit strategies come in two forms, planned or inevitable.
Where do you see yourself today? As a franchisee, you’ve purchased your franchise, invested many dollars of your life savings, worked hard, followed the operations manual, and now you are either reaping the benefits of your franchise dream or are struggling to overcome the challenges posed by the recent challenges in the economic downturn or with access to capital. As a franchisor, you’ve come up with a concept, nurtured it, believed in it, invested in it, watched it grow, and now you are either enjoying the growth you envisioned, or you are trying to find ways to improve your concept in hopes of finally turning the corner toward fulfilling that franchisor dream. While each situation presents different challenges and rewards, they also share an important common denominator. In each of the scenarios described, each has a succession plan or exit strategy in place. Succession or exit strategies come in two forms, planned or inevitable. The primary difference between exit strategies is whether or not your exit is with dignity or under duress. Whether you have input and control over the future of all your hard work or all is left up to possibly all the wrong people.
As a consultant and advisor, too frequently this lack of planning for succession in many businesses occurs. One of my goals is to bring critical concepts into focus for my clients, and succession planning, when done properly, brings enormous satisfaction and peace of mind to clients. Franchisors and franchisees face additional obstacles in setting. up their exit strategies and succession planning. Franchise agreements have significant implications for legal, tax and estate planning options. According to attorney
Consider that for every business, exit or transition is inevitable. Retirement, business sale, business merger, death, sickness, the desire for lifestyle change, unexpected disasters or a down economy may each trigger the business exit. Without proper planning, a business exit can have major financial and emotional impact upon people’s lives, not just the life of the business.
So how does one begin to prepare for this eventuality, especially when the typical business owner is realistically focused on the current state of operations? The simple answer is to deal with it methodically.
The emotional factors involved, whether consciously or not, are monumental. One might be tempted to believe that he can keep emotions in check, that this is just another transaction after all, but selling a business is usually accompanied by several other changes. A business owner will be selling or walking away from his means of making a living. He will be potentially changing his lifestyle, financial portfolio and possibly relying on living on the pool of liquid investments generated by the sale. In addition, the business owner may be walking away from something that has been his life for many years, leaving him angry and defensive with regard to any changes that the new owners are implementing. To help understand and work through this, it is very beneficial to enlist the advice of outside advisors, on the legal, tax and accounting side, that have experience with these situations. Keep in mind; succession planning cannot be started too early. The goal is to be prepared for the next stage and not have it thrust upon the business owner. Start by making the commitment, along with your management team, to begin preparing for the inevitable. Business owners can’t plan for disaster, but they can be more prepared. They can plan today to take control of such a large piece of their future financial security.
Selling the Concept
The key here is to use succession planning as a motivation tool for the management team, while creating synergy between the existing departments. When planned correctly, one must include not only the high-level executives, but all levels of employees. Do not delude yourself into thinking that non-management employees are not crucial to the ongoing plan. If done correctly, the plan can be packaged as a compensation and reward motivation for the employees to help achieve the ultimate goal.
Certain restrictive language within the franchise agreement can have a major impact on a franchisee’s plans. As these transfer clauses may not be the focus of attention upon acquiring a franchise, they are critical legal guidelines upon termination, transfer, death, incapacity, new investors and dissolution. If one hasn’t reviewed the restrictions, now would be a good time to sit with legal counsel and understand what succession options are available.
Although the restrictions are typically on the franchisee, a franchisor’s planned exit strategy can also be quite tricky. Whether the franchisor sells to another concept, private-equity fund, a family member or an outside individual, the franchisee is affected. This can’t be ignored if the transition is to move smoothly. The franchisor should not try to be his advisor. Each situation is unique. There are many qualified professionals that have been instrumental in coordinating smooth transitions. Reach out to them and take advantage of their experience.
Financial and Tax Considerations
Tax planning is always critical in putting together a plan that is both tax efficient and meets the goals of the taxpayer. However, this step can only be accomplished once the business owner has gotten past the steps above. Many of the exit strategies that would be available to most businesses are not available to the franchisee due to the restrictive language of the franchise agreements. Clear those hurdles first before proceeding. Any type of transfer plan must include the franchisor, possibly the franchisor’s legal counsel, and your own estate or tax advisor. Whether one is a franchisee or franchisor, there is a valuable intangible asset that has been created from their years of hard work. Advance planning is the only way to preserve as much as possible in a transfer.
There is an abundance of literature available with guidelines to help aid a planned succession plan, covering the emotional issues, selling the concept, the legal considerations and the financial and tax considerations. But do all things in business go as planned?
The Critical Transfer of Knowledge
Unfortunately, transfer of ownership can happen unexpectedly. This next step is by far the most important aspect of a succession plan and, if done correctly, can even help a business survive the unplanned (disaster or emergency) succession. The potential loss of knowledge and expertise that could occur with a poorly structured succession plan or through an unexpected disaster is irreversible. The most valuable asset any company has is not the tangible assets of the company balance sheet, but rather the intangible asset known as the knowledge that walks out the door every evening. Unless this information is sufficiently documented, a company is not protected for this loss of knowledge. How does a business owner begin this monumental task and when should it be started? When to start this documentation is immediate; how to begin, is a step-by stepprocess.
1. Identify positions with job descriptions. Start with the preparation of a simple organization chart identifying the various positions in your company. A detailed job description should be developed by each employee, ensuring the type of education necessary to perform the position. It is no surprise that there is a major disconnect between what an owner believes particular jobs entail and the employee’s perception of those same jobs. This is a critical step in the process as this is also used in the event that one needs to hire replacements or move staff within the organization.
2. Rate position importance factor. Begin with the individual job descriptions and rate the consequence on the business should there be an unexpected loss of that employee and the respective loss of knowledge. This understanding is very effective in prioritizing a game plan.
3. Determine the approach to capture this critical knowledge. The ideal approach to capturing this information would be the preparation of a step-by-step workflow analysis. This analysis should be done in as much detail as possible including copies of documents and reports, computer screen shots, names and positions at each stage, and documenting decisions that need to be made along the way. For franchisees, the operations manual should be a starting point, but not the final product. This step-by-step analysis, which can be very time consuming, is quite often performed with the assistance of a qualified advisor. Keep in mind that even with the use of an outside advisor working with employees, the regular communication occurring between departments is likely to spur a cross department synergy, which breeds a culture of strength within the company. One very important consideration is not to overlook the stress experienced by employees during this process, especially when the employees’ livelihoods are potentially at stake. Therefore, it is imperative that a positive spin is placed on this gathering of information. Planning for the future can be exciting and if done correctly, can reassure employees of their future, gain loyalty and give them a forum to contribute to the plan.
4. Perform a walk through. Once the plan is documented, test the accuracy. Make adjustments as necessary and schedule to review the process at least annually or when known processes have changed.
Now that this information has been documented, the business owner has the tools to cross train current employees, train new hires and control the knowledge that is walking out the door every night.