Succession planning your restaurant franchise and working with the right set of advisers ensures the decisions you make will benefit your brand.
First, assess the current restaurant market, what your growth versus exit looks like and what future (financial and otherwise) you prefer for yourself and your family. Next, review your restaurant franchise model, restaurant franchise agreement, real estate documents, financials and restaurant franchisor feedback. You will have the start of a roadmap.
Michael Einbinder, franchise lawyer and co-founder of franchise law firm Einbinder & Dunn LLP, and Loyd Rawls, Chairman of The Rawls Group, discuss what restaurant franchise owners should consider before transferring ownership of their franchise. This is especially complicated to navigate if there are multiple parties involved in the transfer.
Three of the most important areas to think about are the restaurant franchise agreement, real estate and financials.
You are bound by your franchise agreements including the provisions that address the ability to transfer the businesses to successors or to third parties.
Multi-unit restaurant franchisees often have several iterations of the franchise agreement (which franchisors typically revise from time to time) and those agreements may contain different restrictions on transferring. Some agreements may require franchisor approval before the franchisee even approaches prospective purchasers or transferee or before the franchisee finalizes a deal with a prospective purchase or transferee.
Often, restaurant franchise agreements reserve certain rights for the franchisor, including rights of first refusal, rights of first offer, rights to purchase the store upon the death or disability of the franchisee’s principal and other similar transfer rights. It is key to understand what rights have been reserved by your franchisor(s) in order to best to accomplish your plan.
The restaurant franchise agreement represents a strategic vendor’s license or an opportunity to monetize the brand. Usually, this license was purchased, sometimes at a significant investment.
Restaurant franchisees should embrace all the provisions of the agreement with the assumption of a positive partnership with the franchisor. If you later determine that the terms of the agreement are incompatible, don’t be a non-compliant, contrarian which will undermine your investment. If it appears that you have joined the wrong team, sell it and move on.
In reviewing the franchise agreement, you should fully understand the successor franchisee provisions. Your attorney should also know your state’s franchise laws—sometimes, there are provisions that are unenforceable.
Recognize that your ability to transfer or sell the restaurant franchise is an essential value-added provision. You must have the right to transfer to your successor without the franchiser stipulating unreasonable qualifications for the successor. Successor qualifications provisions mean the franchiser has quality standards that ultimately supports the value of your investment.
If the restaurant franchisee owns its building or properties, it may make transfer less difficult. If the franchisee leases its locations, lease provisions relating to assignments of leases and change in control of the franchisee entities complicates any succession plan.
There are also often many properties and leases at issue – all of which may contain varying restrictions on transfers/assignments or other problematic clauses.
Principals of franchisee entities are often obligated to give some kind of personal guaranty on real estate leases. When negotiating a sale or when leaving the franchise to family members, the principals should pay careful attention to the guarantees that they have in place with their real estate leases.
Our 45 years of succession planning experience validates that pre-purchase due diligence often precludes the purchase of a restaurant franchise that does not provide the option to own the real estate. Why?
Although restaurant franchises produce income, real estate is where you can enhance a low margin business and build wealth. This diversity of assets, real estate and franchise, will also simplify estate planning if some of your children are not active in your business.
Generally, if you have to pick a restaurant franchise with real estate or a franchise that typically requires the assumption of a lease; go with the real estate. Also, if you sell the franchise, also sell the real estate unless it has irrefutable value beyond occupancy by the franchise. Your lease to the next owner will be worthless if the buyer fails or the franchise loses its glamour.
Clear Growth Feedback and Financials
The best thing to do is to plan ahead. Even at an early stage, work with your franchisor(s) and get feedback on your succession plan.
Review your financial books and records and make sure that everything is in order in the backend because closely held companies, such as restaurant franchisees, do not often invest the time, money or effort to ensure the financials can be easily reviewed by potential purchasers.
This mistake can be costly to the restaurant franchisee resulting in potential purchasers walking away from a deal.
To effectively grow as a restaurant franchisee, ask why do I want to grow? Consider not only your personal and financial cost but also your family and lifestyle cost.
The analysis and interpretation of a balance sheet and P & L should not require an experienced CPA. If yours does, ask why and start making the adjustments to your operations and financial habits to simplify it.
Simple financials are good for everything. If you are presented with complex financials that as an experienced franchisee you cannot understand, give them back and tell the seller to try again.
Although restaurant franchise owners have a unique set of parameters, the one theme that emerges from Einbinder’s and Rawls’ perspective is to plan for the future. This helps to navigate all the unique complexities of your franchise ownership, while also mitigating potential pitfalls and maximizing profit.