Outside Insights | November 2017 | By Guest Author

Why It's Time to Put Franchise Succession on the Menu

Creating a succession plan is about protecting the future of a restaurant franchise.
Does your franchise have a succession plan in place? Flickr: Tetra Pak
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Franchise restaurant owners undoubtedly invest time and money planning for the success of their business—whether that involves managing staff and scheduling, growth and expansion efforts, managing cash flow or marketing and promotions. But they should also consider what will happen to their business when they decide to hang up their apron. According to a recent U.S. Trust survey, fewer than one in three Baby Boomer business owners has an exit strategy. However, ensuring the longevity and legacy of your business through succession planning is important, and it isn’t as daunting as some may think.

Creating a succession plan is about protecting the future of a restaurant franchise and ensuring there are strategies in place for the business to continue to realize its value, even after the owner exits. Rather than reacting to external circumstances, such as retirement or sudden disability, restaurant franchisees can make proactive decisions with a detailed transition plan, whether you’re planning to leave your business to a family member, sell the franchise or liquidate. These are the key components to an effective franchise succession plan:

Key ingredients for franchise succession planning

A capable successor. For those restaurant franchisees planning to leave or sell the business to a family member, partner or employee, it’s important to identify a successor who has the right leadership skills and business acumen to ensure the future success of the franchise. According to the Harvard Business Review, 70 percent of family-owned businesses fail or are sold before the second generation gets a chance to take over and just 10 percent remain active for the third generation to lead.

Communication with the head office. When transitioning a franchise to a successor, the owner will want to engage the franchisor’s head office early, as they will need to approve the incoming franchisee. Owners need to understand what is required of both parties per the franchise agreement, including any training or management courses for its successor, to ensure that the change of hands won’t disrupt day-to-day restaurant operations.

Know when to sell. Every restaurant has its ups and downs. Seasonality, national trends and the health of your local economy may affect your business in various ways. While it may be tempting to hang on when things are going well, that’s often the best time to sell if you aren’t keeping the business in the family.

A detailed plan of transition. A detailed transition plan should map out short- and long-term goals and engage a team of advisors that can help ensure a smooth transition. This should be a diverse group that can provide specialized counsel, including a business attorney, an estate lawyer and your banker. Many business owners opt to designate their personal financial advisor as a point person to coordinate the team’s efforts while clarifying the overlap between business finances and family wealth.

An estate plan. Investigating the best ways to help pay estate taxes and other associated costs is an important dimension of succession planning because the liquidity of the business will determine whether it can help offset estate taxes and other expenses. Gifting wealth, buying life insurance, refinancing business loans or moving liquid assets to new accounts can greatly simplify matters for successors, and optimizing these strategies requires in-depth planning.  

The right time. When’s the right time to start succession planning? It’s never too early, but ideally business owners should begin planning three to five years ahead of an anticipated transition. Life can be unpredictable, and it is critical to ensure employees and businesses are set up for future success after an owner’s exit.

Succession planning doesn’t stop once a plan is developed. Franchisees should review plans on an annual basis and reevaluate as the business grows or hits key growth milestones. Owners’ priorities change and aspirations for their legacy continue to evolve over time.

Cristin O’Hara is a Managing Director and head of the Bank of America Merrill Lynch Restaurant Finance Group. O’Hara has been with Bank of America Merrill Lynch and its predecessor banks for more than 20 years. During that time she has served in Global Commercial Banking, Debt Capital Markets, and Global Corporate and Investment Bank.