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Succession planning for the next generation of franchise owners

On Behalf of | May 31, 2018 | Business Law, Estate Planning, Franchise Law |

Only 30% of family owned franchises will survive after the owner retires. Furthermore, it is estimated that only 10% of franchisees have succession plans in place. Do you have a plan in place for your children to take the reins once you retire?

What is succession planning? Is it just about retirement? Succession planning is much more than retirement. Transition plans identify specific tasks and timelines that will ensure the smooth transition of business operations and management to the next owner. The prime goal is ensuring order and continuity of the business during all stages of the change. But how does one accomplish such a goal?

The first consideration in multi-generational succession planning is communication. Has the transition been clearly discussed with your family and staff? Do your children feel comfortable enough to be honest with you about their feelings and expectations regarding the business?

Who is in charge here?

When multiple family members are actively involved in the business, the topic of succession is commonly avoided to prevent hurt feelings. Be assured your family members are better off knowing how this process is going to unfold before it happens rather than after.

  • If you have chosen a single child or want a group to work together- are they aware of your wishes? Do the other members of your family know that you intend to pass the reins to this person or group?
  • For children, a good time to introduce the topic is when they are teenagers.
  • Experts recommend that children get an education, experience employment outside of the franchise for at least five years, then following this exploration decide whether they want to take the business over.

Gain corporate approval

Since franchisors sign off on the transition of ownership, do not neglect to include them during the planning process. Some key considerations include:

  • What requirements does the franchisor require of a franchisee? Does my successor possess the necessary training or certification? How long will it take to acquire if he or she doesn’t?
  • Will the successor franchisee sign a new franchise agreement with the franchisor or will the parties execute an assignment of the existing agreement to the new owner?
  • Become familiar with the franchise’s transfer policy, if one exists.

Big picture planning

A key portion of succession planning is implementing appropriate gift and estate tax planning to maximize savings to avoid a situation in which the franchise is sold off to satisfy tax debts owed to the estate. Hire appropriate advisers to write wills, trust agreements and assist with business valuation issues that will arise. This includes attorneys, accountants, business consultants and bankers. These professionals assist with needed documentation and procedural matters such as:

  • Buy-sell and partnership agreements
  • Consent to transfer between franchisor and franchisee
  • Stock ownership and transfers
  • Creation of any trusts or life insurance plans, for example: an irrevocable life insurance trust or grantor retained annuity trust

Putting the plan in action

The transition of ownership should take place over time, executed in gradual steps. It is important that you prepare yourself emotionally for these stages. Have your successor work closely with you, gradually delegating more tasks, looping them into interactions with vendors, suppliers, payroll, insurance issues and other administrative tasks to fully prepare them for success. This will strengthen the new relationship between the successor and those you regularly deal with to build trust and confidence in their ability to run the franchise once you make the move and retire.