Suspended in a State of Succession Planning Limbo
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Suspended in a State of Succession Planning Limbo

Suspended in a State of Succession Planning Limbo

Some multi-unit franchisees are lucky that the decision to keep or sell is fairly simple - the next generation is ready to carry the baton, or there is no family involved in the business at all. Unfortunately it seems that most are suspended in a state of Succession Planning Limbo. Since I don't know any business owners who prefer to give up control of their business, it is always surprising to see owners willing to "punt" on the ultimate decision. The most common explanation is that they are worried about making a poor decision and/or lack clarity on planning options available to them.

Let's take a look at a few ways to start getting out of limbo:

1. Plan for a family member successor with an escape hatch: "My son/daughter is committed but isn't ready yet so I guess I'd have to sell if something happened to me." OR, "My family member has checked all the boxes but I'm not sure they won't run it into the ground."

Planning in this environment requires special attention to the retention of key managers, strategic planning, successor development, and business structuring. Every successor needs a strong team with them, especially when the unexpected happens and they're not quite ready. To avoid a distressed sale and keep the option available for the family, we recommend the use of a Golden Handcuff structure to ensure the key players are motivated to keep the business profitable while picking up extra slack. Second, they will need to know where the business is going and why they are doing it (Strategic Planning) to ensure they are working toward the same goal. Third, the successor will need clear developmental path to ensure they gain the competency required to run the business while earning the respect of the team along the way. Lastly, the business will need to be properly structured to ensure ownership opportunities are possible for any successor, including temporary key manager successors, if required by the franchisors.

In the event that a successor does not succeed, the business can always be sold for top value as long as the management team and key manager successor are running things effectively.

2. Plan for a sale with the opportunity for family members to earn their way in: "My son/daughter has the talent to continue the business, but won't make the commitment to it."

Addressing this issue requires careful business and estate planning documentation to create the necessary flexibility. The assumption is that the owner will position the business for a sale, minimally creating a list of buyers, key contacts, and an expected value to assist the executor/trustee in consummating the sale. The challenging component is creating the opportunity for a family member to mature and/or change their minds and make a commitment to continue the business on through another generation. The documentation written in black/white must address the gray. This approach will also require the development of family governance documents that articulate the nature of a "commitment" to the business based on the family values and the culture of the business. Timeframes and benchmarks need to be clear as well. Similar to the first concept, this approach will require the buy-in and retention of key managers.

3. Plan for a sale to a key manager with a way out: "My key manager has been with me a long time and wants the chance, but I'm not sure he/she can afford it and I don't want to give it to him/her."

This planning is very popular because it is designed to allow business owners to work as long as they like. The amortization of the sale of a business can be tailored to meet the exit strategy of the owner. Since the process of buying will be over time unlike a sale to a third party, the owner can determine when and how control (via voting shares or majority interest) is realized by the key manager and therefore when retirement starts. At the same time, the business owner can retain the right to sell to a third party. This plan will require carefully drafted business agreements, personal financial planning, strategic planning, and business structuring considerations.

These options are available to any business owner willing to engage in the process, understanding that it takes a team of advisors to develop an effective plan.

 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

Published: March 20th, 2019

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