How a clear succession plan helps ensure generational continuity.
More than 90% of businesses in the United States are family owned – hundreds of thousands of them franchises – but only 30% of them survive the retirement of the original owner.
If you’re a franchisee and your goal is for a family member to eventually take over the business, you need a succession plan in place at least three years before you plan to retire – ideally, much sooner than that. You never know when the unexpected can happen and the successor will need to take over.
Implementing and executing a strong succession plan can help create generational continuity and enable you to enjoy your hard-earned retirement. While the core concepts of succession planning are similar for all family businesses, franchisees will have a few special considerations.
The first step toward succession is to have open and honest conversations with your family about the future of the business. These discussions can be uncomfortable – especially if family members have competing interests – but they are essential to implementing an effective succession plan.
A framework that might help you structure these conversations is to consider the why, what, how, who and when of the plan.
Why do you want to keep the franchise in the family? Your reasons for becoming a franchise business owner may have been to build long-term value and generational wealth – but often, the “why” extends beyond the family. Over the years, your business may have become a pillar of the community, reliably providing necessary products and services for your customers or clients. Make sure your family can identify these “north star” reasons.
What does the business look like now and in the future? Share your business roadmap with family members, along with information about your differentiators and investable assets. Are you hoping – and able – to expand your business into more units or even new concepts? How will doing so further your family’s values and financial objectives?
How do you want your business to be governed once you retire? Establish whether you plan to continue to play a role in running the business after you retire. Often, franchisors will not release the original franchisee from liability after the transfer.
Who will have a say on the future of the franchise? Determine and make clear which family members and non-family stakeholders will participate in the decision-making process once you retire, and what their involvement will require. The franchisor will need to approve your choice of successor and is likely to require they have certain qualifications, such as education, experience and business acumen.
When should all this happen? The sooner, the better. As soon as your children show interest in the business, start involving them in conversations about the business and, once they’re college age, consider including them in business decisions.
Another important consideration is your personal financial goals and retirement needs, and how your succession plan will accommodate your heirs.
With clear and open communication established within your family, it’s time to begin the process of implementing your succession plan.
You might choose to work with just a few family members to help decide on a successor, or you may want to bring in professional advisors, such as your attorney. It can be beneficial to do both: Ensure your family has a say, but also include business experts who understand what will be required of the person you ultimately choose.
From general intelligence and enthusiasm to highly technical abilities, determine the attributes, skills and experience your successor will need to have. Remember, franchisors will require the transferee to have certain qualifications – though they may be less stringent for family members.
With your advisors and criteria in place, it’s time to identify your potential successor. Doing so can be difficult if, for example, you have to choose one child over another, which is one reason business owners put off creating a succession plan. You might even find you have two strong candidates, in which case you may work with both of them to ensure one or both are prepared to effectively operate the business in your absence.
The franchisor has the right to approve or deny your choice of successor. It’s a good idea to get the approval in writing so there are no misunderstandings when the time comes to transfer the business. The approval will typically state any contingencies, such as the successor completing specific training programs.
It can take one to three years to prepare a successor, giving them time to complete any educational or other training requirements, absorb business knowledge and make the mistakes you can turn into learning experiences. Your successor might start their training by simply shadowing you, and gradually take on more tasks as you delegate them.
Not only does the transition period give your successor time to get acclimated, it also gives your employees, customers and other stakeholders time to develop confidence in your successor’s abilities and get comfortable with the change.
It can take one to three years to prepare a successor, giving them time to complete any educational or other training requirements, absorb business knowledge and make the mistakes you can turn into learning experiences. Your successor might start their training by simply shadowing you, and gradually take on more tasks as you delegate them.
Not only does the transition period give your successor time to get acclimated, it also gives your employees, customers and other stakeholders time to develop confidence in your successor’s abilities and get comfortable with the change.
Estate and liquidity planning is a critical component of your succession plan. Failing to consider the impact estate and inheritance taxes may have on your family could result in your heirs needing to sell the business to pay the tax bill.
It’s important to work with your attorney and CPA to help minimize the tax consequences for your family members – say, by using a vehicle such as a family limited partnership, trust, or buy-sell agreement. Be sure to check with your franchisor to get permission before implementing one of these strategies.
Implementing and executing an effective succession plan can be a complex undertaking, which is another good reason to start the process early. But having a viable plan in place can help you and your family maintain business continuity and enjoy the benefits of your years of hard work.
Sources: Franchise.org, Franchisewire.com
Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
