Should I Stay or Should I Go?: Developing a Successful Transition Strategy

You've worked hard to build your multi-unit franchise business, and now it's time to step back--not only from the day-to-day operations, but perhaps from the business itself. Is it time to let go? Can you? Will the business continue without you?

This is a business decision, right? So where are all those feelings and emotions coming from? Your hopes and fears about the prospects of change and the loss of your role of many years (not to mention the business income) are natural. Adding to this is the realization of how many other people your decision will affect: family members, business associates, managers and staff, and even the communities where you have your business.

Once you've made the decision (strategic), it's time to explore how to do it (operational). That's when the questions begin. Do you pass it to your children, sell it to your top management team, to a third party, or back to the franchisor? Do you sell it lock, stock, and barrel and walk away into the sunset? Stay on in a limited role? Keep a percentage? Get involved with the risks and rewards of seller financing?

A successful exit or transition strategy takes time. It involves taking an inventory of all the different components of your business and your personal life and weaving them into an integrated strategic plan.

How much money will you need to continue your current lifestyle? Or if change is in the offing (travel, leisure, a move to your retirement villa in Costa Rica), how much will you need to support your new lifestyle? Are the grandchildren going to college soon, and will you be asked to help? Should you set up a foundation to support your favorite causes--and reduce your tax bite?

And what of the peculiarities of franchising, compared with any other business model? For instance, right of first refusal, or qualifying family members as potential franchisees. That will demand another type of expertise.

Your various advisors may be the greatest in the world at what they do, but by definition, they are specialists: accountant, attorney, broker, investment advisor, insurance agent, etc. What's needed, say retirement planning and estate management professionals, is a person or organization with an understanding not only of each moving part, but more importantly, of how they all play together. In addition to possessing financial, legal, and investment expertise, this person or firm should possess the attributes of a personal therapist, family counselor, coach, guide, and perhaps most important, trusted advisor.

Okay, enough questions. We spoke with three veteran multi-unit operators to learn how they are responding to them. We also spoke with Andy Horowitz, president and CEO of The Wealth Management Group, who has been helping all of them exit gracefully and pass on the business to their children. (See sidebar for his "12 Building Blocks to a Successful Transition.")

California Dreaming

Nick Lardas, 75, bought his first McDonald's in 1972, in Ridgecrest, Calif., in the high desert about 150 miles northeast of Los Angeles. It was in the middle of nowhere, but the China Lake Naval Air Weapons Station provided a steady stream of customers.

His introduction to the McDonald's system came through his first wife. "Her uncle introduced me to Ray Kroc and got me on the franchise list," Lardas recalls. When his wife was diagnosed with cancer, she was treated in Santa Monica, 150 miles away. There was a McDonald's for sale in that area, and the franchisor helped them make a trade. He grew the business to five restaurants in the Los Angeles area before selling two to his son in late 2007.

Lardas and his son met Horowitz about five years ago at a seminar McDonald's held in Palm Springs. His son was friends with the son of another McDonald's operator who was using Horowitz to map out a transition strategy, and they recommended him. "He helped those guys. They said how good he was and liked the stocks they put him in. I think we were his second client."

His son already owned 51 percent of two stores, and Lardas sold him the remainder. He says Horowitz worked with his accountant to structure the sale through a stock ownership arrangement to reduce the tax consequences. "I sold it to my son cheaper than to a stranger. I wanted to help him. He runs the stores and I want to take care of him," says Lardaz. Horowitz then invested the proceeds for the senior Lardas.

Starting the process wasn't easy for Lardas. Horowitz first met with him at his office to gather his business and personal information--net worth, insurance, stocks, etc. Then they drove to Lardas's home, where they sat down with his wife. "At first you don't want to tell someone everything you have, but over time you see he's a pretty honest man," says Lardas.

At the time, Lardas co-owned some stock, which Horowitz suggested he sell and move into other investments. "All the stuff he put us in seemed to work pretty well," says Lardas. "The only time that it hurt was when he first sold the stocks I had with the other guy. I got hit with capital gains. I had to sell them to get what he wanted."

Lardas says Horowitz asked them a lot of questions about their plans if they retired, and if they wanted to sell their restaurants to their son. "He'll give you options on everything." He also educated them on investment and tax-saving vehicles. "You don't think of tax involvements if things happen to you," says Lardas. To take care of his three children from his first marriage, Lardas (who has since remarried) bought $1.5 million in insurance to leave them $500,000 each--and avoid taxes they otherwise would have to pay.

The current plan is to sell one more restaurant to his son and keep two that his son can run. "If something happens to me, my wife has one year to get approved, working with McDonald's to give my son first shot at them," says Lardas.

In the sale of the two units to his son, says Lardas, "I told Andrew which ones I wanted to sell. McDonald's has a formula for price. He helped my son get the financing. McDonald's has three to four key lenders, but they were getting kind of picky at the time."

Lardas says Horowitz is always invited to McDonald's meetings. "The only people invited are our suppliers, etc., who are approved by McDonald's." (McDonald's declined to be interviewed for this story.)

"Now his big thing is sell my office building," says Lardas, of his Venice, Calif., building. "But I like it here in my office, with the store downstairs. I own it and my son lives upstairs."

One of the common threads among the three multi-unit operators we interviewed was their own (understandable) tendency to put off retirement planning--and their 20/20 hindsight in recommending everyone begin thinking about it, making plans, and putting them in place as soon as possible... no matter where they are on the road to retirement. "We never think of that when we're younger," says Lardas. However, some things never change, he says. "My son keeps putting it off." But he has Horowitz working on his son to start now, and Lardas says he's beginning to make some progress.

North to Alaska

Dennis Lavey owns a 130-room Days Inn and a neighboring Country Kitchen in Anchorage, Alaska. He had a U-Save Car & Truck Rental franchise (for his hotel guests), but sold that off some years back.

Like most entrepreneurs, he was busier building his business than planning how to leave it. "I had somewhat of an exit strategy, based on my age," says Lavey, who turns 67 in September. But he had nothing specific in place when he was introduced to Horowitz about 18 months ago.

"We were talking to some lenders in the lower 48, and one in Oregon had recommended him as sort of a planning strategist type so we could get our ducks in a row. We didn't know how we were going to accomplish this."

Based on this recommendation from people he knew and trusted, Lavey contacted Horowitz. "We talked on the phone a couple of times, and he gave me some references, his McDonald's franchisees. He seemed a pretty legitimate guy, so I said come up and visit."

When they met, Horowitz explained what his company did, and Lavey and his wife told him what they were looking for. Good fit, good timing. "We engaged him to work on estate planning and exit strategies," says Lavey.

In the initial meetings, he says, "He got us to verbalize our internal thoughts about what we want to in retirement." Lavey now speaks regularly about the business and the future with his bank, his son, with Horowitz, "and naturally, with my wife."

Lavey, whose wife retired about seven years ago, had been urging him to retire, to no avail. "We bought a motor home. It's been parked two years," he says.

Again, through purposeful questioning, Horowitz opened the Laveys to their options in transferring the business and setting up a retirement plan. "He helped us with figuring out what do we really want out of life. He got us thinking about what can we do with our time, and how much should we budget for travel. I've never been a big budget guy. I just figure out a way to pay for it. He got us thinking about budgeting."

Keeping the business in the family is Lavey's first choice. "I think that's always the best," he says. As for selling it to other franchisees, "There's some opportunity there. If I were to market it, I'd go there."

His son, he says, wasn't interested in taking over the business until he got wind of his father's talk about selling it. "He said, 'Wait a minute, this isn't good for me.'"

Now in his 40s, his son had grown up in the business, starting by washing dishes when he was 10. "He knows everything I know, and he's a marketing guru. He knows the Internet inside out, and today everybody books on it. He got us in positions where we get the bookings first."

After his son graduated from college, where he earned a degree in marketing with a minor in business, Lavey insisted he start out by working for other companies to gain experience in the corporate world. "He realized he was smarter than some of the people he worked for," says Lavey. "I also think he realized that he's never going to be top dog somewhere else. And he enjoys this."

His son, says Lavey, would like to buy him out right now. "I'm too costly for him. I take quite a bit out of the business. He'd like to give me a couple million and have it for himself." But the time isn't right.

So when is the right time to sell? "That's the million-dollar question," says Lavey. "2007 was the right time. Hotels were at their highest value--the market was ripe, interest rates were low, and banks were lending--but it was too early for me. And now is a year too early."

And what is the right price? "You sell it at its highest value--even to your own son," says Lavey. "Because when I sell, that's it for me. I don't have the opportunity to jump back in. He does. And I know the value will increase 5 to 7 percent a year, and I'll have to live on a fixed income--and I'm used to taking what I need."

Lavey agrees with Lardas that when it comes to retirement planning, the time is now "because time goes by so fast. We built the hotel 25 years ago," he says, sounding both wistful and slightly surprised, as if that can't be possible. "At least put your thoughts down on paper and review it every six months. It takes money to retire, and it's tough to save. You spend it on new equipment, etc. You better put some away for yourself."

Should you involve family members? "Absolutely," says Lavey. "If you want somebody to take over, you better involve them, because they may have a different idea than you do. And the earlier the better. Get them all the education you can."

After 18 months working with Horowitz, Lavey has some questions of his own, big ones. "If I sell it for $4 million, where do I put that? If I sell it for $7 million, do I donate to charity?" So far, Horowitz has helped him with investment advice, in creating a foundation, and in setting up 529 college savings plans for the five grandchildren.

"We're going to create a foundation to donate to charities we really like," says Lavey. "He got my son and his wife in on it too, to see if their wants and needs conflict or dovetail with ours." He also lets his daughter and son-in-law know what's going on to avoid duplication, like the 529 plans. "They can use their cash for other things," he says.

"It's pretty much worked out. We know what the hotel is worth. We just need someone in this day and age who's willing to finance the buyout. It used to be you could finance 80 percent, now it's 60. I have no problem with waiting until lending comes back. Lavey says the size of the hotel puts him in a unique position. "We're too big for the little guys and too small for the big guys who want something in the $15 million to $20 million range. We're in the $11 million range."

As they used to say about voting in Chicago (Lavey's home before he moved to Alaska to cash in on the construction boom in his pre-franchising career), think about retirement early and often--and put some cash away. "Figure out who's the best to take over. Develop employees. I thought about ESOPs because I have some great employees. I plan to take care of them with great cash bonuses. My two most important employees know they'll be well compensated."

Today it's all working out for the next generation--and the one after that. His son has decided he wants to stay in the business, and his grandchildren seem interested as well. Lavey's 16-year-old grandson will be a bellman and work at the hotel front desk this summer (the busy season in Alaska), and his 15-year-old grandson will work in the restaurant as a busboy. There also are two granddaughters, 10 and 9. "They jump up and help at the restaurant and have shown some interest too. They think it's cool grandpa owns a hotel and restaurant. They ask, 'Can I work there?'"

Even after the eventual sale, there's more business in store for Lavey. "I'll never retire," he says. "I would retire from the day-to-day at the hotel, but not from life, and not from business. We own quite a bit of real estate; we bought up everything around us with money from the hotel. I can do that from anywhere," including from his condo in Las Vegas. "Part of my exit strategy is to own 10 percent, clip coupons, and enjoy."

Community Foundation

About 10 years ago, C.C. Yin, 73 began thinking about retirement for himself and his wife Regina--and how to pass their 26 McDonald's to their children. They couple had been in the McDonald's system since 1984, when Yin left his career as an engineer to pursue the American Dream.

The couple bought their first McDonald's in East Oakland in 1984. Yin says it was not only the worst unit in the system, but the neighborhood was so overrun with drugs, gangs, and gunfire that they feared for their lives every day. Regina left her job as a social worker and used her skills to build ties with the community. Within 18 months they not only lived, they had increased annual sales from $1 million to $2 million.

"We're lucky we were not killed. We were scared of course, but made a lot of friends," he says. "Oakland is a great city. Even the worst location has great people, they're just not organized. That's where I learned about the people power of community. That's my passion."

Decades later, having long ago sold their five Oakland units and moved to California's Central Valley, the Yins began contemplating retirement--or at least a way for C.C. to pursue his passion for community involvement. Today Yin and his wife have 20 McDonald's, and "the children" have 6, spread over 10 cities and 4 counties.

He started by asking his business associates, friends, and fellow McDonald's franchisees for recommendations. He found his relationships with banks and insurance companies were helpful, but limited. "They were very partial and have one purpose only," he says.

"The banks helped me get started, to understand the complexity," he says. "But I was looking for someone more comprehensive," who not only knew enough about each component of a retirement strategy, but who also had the big-picture view and know-how to ensure all the pieces would work together to achieve their business and personal goals.

"I have lot of friends in the McDonald's system. I asked them first," says Yin. "Each franchisee has a different model because of timing and life philosophy." Family size and interests come into play, as do timing, retirement plans, and age.

McDonald's also pointed him to other family franchisees in the system, which he says was very helpful. "I'm 73. Normally people exit around 65. For the last 20 years they've been asking me, 'C.C., what's your plan?' I would say, 'What plan?'" says the energetic Yin with a laugh. "Sometimes you forget about your age when you work like I do. They were very helpful, reminding me all the time, 'What do you plan to do 5 to 10 years from now?' They gave us advice, encouraged us to talk to other franchisees, and to pass on our knowledge."

The franchisor also continued to introduce the Yins to other McDonald's multi-unit operators, who told them what they were doing. "In the last 20 years, a lot of people were getting older like me. McDonald's was encouraging the second generation to enter, and to help the older one to exit," he says. "In the last 10 years they started to introduce outside service companies to help their franchisees."

About six or seven years ago, a McDonald's colleague pointed him to Horowitz and The Estate Management Group. Determining the family's goals was one of the first steps in the process. As usual, Horowitz asked focused questions to help the Yins clarify their current status, their plans, and their goals.

"The area I liked most is the nuts and bolts," says the engineer in Yin. "He guides us, sets up periodical meetings with the family to meet for a day or two, and there are always new question because we don't know what's coming on the tax, finance, or the investment side."

Working with Horowitz, the Yins created a foundation to support the many nonprofits, scholarships, and community organizations they were already involved in--an activity that began in East Oakland. "We give a lot of money out. Andy helps us to manage that. It also helps to reduce our taxes," says Yin.

Horowitz also has helped the Yins with their investments. "I used to invest everything into the McDonald's, the community, schools, etc. in the past. There was not much investment into the stock and insurance side. Andy is very useful with that." Despite his continuing education on these topics, Yin says, "I still need it. This is a new world to us. It's very complicated on the tax side and financial planning area."

Yin says he learned a lot about community growing up on a farm in Chengdu, China, until he was eight. After engineering, McDonald's became his second passion, and today, already deeply involved in giving back, Yin is ready to work full-time on his third passion: helping Asian Americans take an active role in local and state government and become future leaders. He's doing that through the Asian Pacific Islander Public Affairs Association (APAPA), which he co-founded. APAPA, an all-volunteer organization, has 6,000 members and 4 chapters.

"It takes a huge amount of energy and time and outreach," says Yin, who at nearly 74 has plenty of energy. "It's rewarding spiritually, not financially." It's a sacrifice though, he adds. "Andy's been helping me to free my time, and also to put some of my money into the nonprofit side." For C.C. Yin, there's more to the American Dream than making money, much more.

Retirement Planning: 12 Building Blocks to a Successful Transition

In their 2008 book, "The Next Step for Business Owners: The Ultimate Strategy for a Successful Transition," co-authors Nicholas Niemann (a partner with the Omaha law firm of McGrath North Mullin & Kratz) and Andy Horowitz (president and CEO of The Estate Management Group, Valencia, Calif.) provide a step-by-step guide for those ready to embark on the path toward selling or otherwise transferring ownership of their franchised business.

Their approach is embodied in their program, The Next Step for Business Owners Transition Growth System, which includes workbooks for each building block, CDs, a roadmap, and even a scorecard (www.nextstepforowners.com).

1. Decide what I want.
2. Determine what I've got.
3. Protect my family.
4. Protect my business.
5. Protect my business ownership.
6. Grow my non-business family wealth.
7. Grow my business value.
8. Develop, keep, and transition duties to my management team.
9. Prepare my business for my eventual exit.
10. Act now to implement tax-saving strategies.
11. Prepare for a transfer to my inside team.
12. Prepare for a sale to an outside buyer.

Note: Horowitz discusses each of these 12 building blocks in detail each month in FUMG's online newsletter, Multi-Unit Franchisee Report. To sign up, www.mufranchisee.com/newsletter.