Franchisees, like other business owners, work hard to make their businesses successful. It’s typical of many of these entrepreneurs to have the desire to pass their franchises on to the next generation in their families, but this can often be a complex endeavor.
Unfortunately, many franchisees do not take the time early on in their business to plan for the succession of their companies, which can put their investments at risk.
Back in the 1970s and 1980s, many baby boomers found the idea of jumping into a franchise very attractive, considering the fact that they were essentially getting into an established business model that didn’t need to be built from the ground up.
As the baby boomers continue to retire in large numbers today, many of them who own a franchise is now being faced with tough decisions about how they will exit their companies and effectively pass them onto to their heirs while protecting their businesses at the same time.
Although it’s true that franchisees have to deal with the same succession planning issues that typical businesses do, they’re also faced with additional tasks. For instance, franchisors typically stipulate specific requirements in the franchise agreement that need to be satisfied prior to the franchise moving from one party to another. This is why it is critical to plan ahead.
No matter when you plan on retiring, there are key factors that franchisees need to consider.
Integrate Your Exit With Your Personal Wealth Planning
The best time to start succession planning is at least a decade before planning to exit the business. There may be requirements that franchisors have for new capital investment and expansion planning that can have a significant effect on the value of the business when the owner actually plans to leave. These changes can in turn have a significant impact on the financial value that an owner can take from the business.
As a business plan is devised, it should ideally be integrated with a personal finance and wealth transfer plan. Failure to start this integration early on might prevent business owners from retiring and transitioning their business, thereby limiting their options.
Without putting a succession plan in place well before exiting the business, many unwanted scenarios can result. The business can be shut down, the courts can deny the heirs of the business, and estate taxes may lead to a fire sale of the business. Having a plan in place can avoid such scenarios.
Determine What the Franchisor Wants
Franchise agreements typically stipulate the specifics on how a franchisee can transfer ownership of the business. However, it’s crucial to gain a solid understanding of what the franchisor will look for in a new owner to help streamline the transition and boost the odds of approval of the deal. The franchisor will obviously have a valid concern about a number of factors, such as reputation, revenue, and operation, to which each owner contributes to.
Franchisees are typically responsible for finding an appropriate buyer when it comes time to sell the business. Under these circumstances, franchisors don’t usually have a lot of time to evaluate the chosen buyer. If it turns out that the buyer does not meet the franchisor’s criteria after the sale has been completed, any future revenue stream can be compromised.
Asset protection is a critical component of all businesses, including franchises.
This is why it is important and extremely helpful for the franchisor and franchisee to work together to develop a plan of succession that meets the needs of both parties. In this way, any issues that would have normally plagued the situation can be effectively avoided.
In this case, a succession plan can involve the franchisee naming a successor, after which the franchisor will have time to evaluate and approve the successor. Both parties can work together long before any plans to exit the business to guide and train the successor to ensure the franchise remains a success.
Consider a Joint Venture Arrangement
Franchisees could potentially transfer their businesses to an employee via a joint venture, as long as the franchiser grants approval. In this case, the franchisee would select the employee who would eventually obtain the business. Then the franchisor would grant this successor with the right to buy the franchise at some point in the future based on a specific agreed-upon price.
It’s a win-win situation for everyone involved: the franchisee establishes an exit plan, the franchisor obtains a qualified franchisee, and the employee taking over already has the experience to ensure the continued success of the business.
Asset Protection and Legal Entities
Businesses are often targets of lawsuits, particularly the more profitable and valuable ones. Considering the threat of litigation, it is important to take advantage of legal entity structuring and asset protection in order to protect the business and its assets.
Asset protection needs to be put into place long before there is any chance of such legal issues to arise and simply involves placing business assets out of reach of potential claimants. There are different plans that can be devised within this realm, including a Family Limited Partnership (FLP), Limited Liability Company (LLC), or even a Corporation.
While traditionally these issues were protected by insurance policies, such solutions are no longer applicable, and instead should be combined with some form of legal entity structuring. By placing the business assets and property in its own legal entity, ownership can effectively be separated from assets. The goal here is to protect franchisees from personal liability and sequester the assets that litigation might affect.
The Bottom Line
Franchise business owners need to tackle a variety of issues long before the concept of exiting the business is even contemplated. Failure to take these necessary steps can leave the business vulnerable to litigation, heavily taxed, and with no control regarding who the successor(s) will be.
Franchisees owe it to themselves – and their families – to implement an asset protection plan for their business early on. But without the necessary information and guidance, franchisees have little recourse. This is why we at Asset Protection Academy have collected a vast amount of information and resources and made it available to America’s franchisees so they can adequately protect their businesses.
Find out more about asset protection by joining an upcoming webinar at Protect Wealth Academy.