Worried About Your Succession Plan? So Are Your Franchisors

By: Jeff Bannon
Published: January 23rd, 2019

Based on privileged conversations with several franchisors, the lack of clarity of a succession plan and preparedness to execute one are among their top concerns. This is in large part due to the concentration of revenues among a small percentage of their franchisees - the 80/20 rule. (Eighty percent of the revenue is generated by 20% of the franchisees.) Some more seasoned franchisors have created requirements for their franchisees to identify their successors who must be formally approved prior to any transition of ownership or executive management. Failure to comply results in the execution of a first right of refusal by the franchisor. It is safe to say that franchisor redemption is the least attractive option when attempting to realize the highest value for the sale of your business.

There are several options for the disposition of a business, each of them requiring a higher level of planning than is often given. In just about every case, franchisors would prefer not to redeem stores that are historically profitable under good management. It is in everyone's best interest to develop a plan for the continuity of profitability - which is exactly what succession planning is about - whether it's a sale to a key manager, sales to a third party, or transition to the next generation of family.

A major franchisor recently shared that the average age of their franchisees is 62, and only 8% had identified a successor, let alone developed a plan to make it happen. Another franchisor shared that 72% of their stores are owned by 30% of their franchisees. Recognizing that executing a succession plan takes more than simply handing over the keys, franchisors are aware of the clock and the challenging odds they face with significant transition on the horizon.

These are just a few common, basic factors when beginning to consider alternatives:

• Sale to a Third Party - "When I'm gone, they can sell it" - To whom? For how much and what will the market look like? Who will run it and how long will it take to ensure a good deal can be made without distress? How will the family recreate the income previously generated by the business?
• Sale to a Key Manager - "He/she's been with me a long time and deserves it" - How will a key manager afford it? At what terms - will the family have to wait to receive the value of the business? When will the key manager be ready to take over? How will the rest of the management team react?
• Transition to the next generation - "They will carry on my legacy" - Sibling rivalry? Are they ready and have they been approved? Who can bridge the gap until they are? Can I develop a wait-and-see plan? Protection from divorce/in-laws? How do you create a fair estate plan? Should everyone own the business? How do you communicate the plan?
• No Plan - "I like what I'm doing and don't want to give up control" - Typically, business owners struggle with the idea of not being in control and believe that succession planning is about giving up control. This may be why several business owners wait until the last minute to throw a plan together when life forces them to. Ironically, succession planning is the only way to retain control. Taking the initiative to tailor a succession plan for their business is the only way to avoid using the government and franchisor's plan - which no entrepreneur has ever wanted to rely on.

Some franchisees are hesitant to begin succession planning, proclaiming "I'm not ready" or "I'd rather not think about it." Those are both fair feelings, but the fact is that succession is a significant component in any business plan. Without a plan, future profitability is subject to little more than random luck. Addressing succession will alleviate your franchisor's concern in addition to providing reassurance to everyone who shares a vested interest in your ongoing success.

 Jeff Bannon is a partner with The Rawls Group - Business Succession Planners. With over 45 years of succession planning experience across a multitude of industries, The Rawls Group has developed a time-tested process to address any issue impacting the current and future success of the business. For more information visit www.rawlsgroup.com or email info@rawlsgroup.com

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