Those of you who are franchisees pay close attention! Have you developed a succession plan for your business? If so, I commend you as many of your peers talk about having a succession plan, but have yet to develop formal documentation that reflects their goals and objectives. Now let me ask you another question. Does your succession plan consider requirements in your franchise agreement such as ownership transfers or successor qualifications? If not, I suggest you shake the dust off of the franchise agreement and find the specific paragraphs that relate to successor nominees, ownership transfers, death, disability etc. Many times the franchise agreement is overlooked or in some cases ignored when franchisees develop their succession plans. This could result in a violation of your franchise agreement possibly resulting in significant consequences such as the derailment of your succession plan!
Approximately five years ago I encountered a franchisee that transferred a minority interest in his businesses to his children which happened to be an excellent estate planning move. The client was successful in transferring more than two million dollars of business value to the next generation by taking advantage of available discounts in conjunction with a low business value at the time. Unfortunately, he had not received permission from his franchisor as stipulated in the franchise agreement putting him in violation of the agreement. Fortunately, he asked for forgiveness and was able to gain approval from his franchisor after the fact. However, some are not so lucky. More often than not, franchisors exert pressure or leverage situations such as this by requiring the franchisee to build new facilities or comply with new image standards.
Here are a few suggestions for you to consider as you approach succession planning with your franchisor:
- Review your agreement to ensure you fully understand the impact on your succession plan.
- Engage your District Manager/Zone Manager (or the appropriate contact) and leverage your relationship while you are alive to get your successor pre-approved. Generally speaking, they are glad to help facilitate your request.
- Be proactive so your surviving spouse or heirs are not grappling with these issues at an inopportune time such as at your death or in the event the local contact you have formed a close relationship with gets transferred.
- Seek approval from your respective franchisor prior to making an ownership transfer.
Respecting the language in your franchise agreement and proactively working with your franchisor should help you avoid a succession pitfall. While this may appear to be an inconvenience today, it could save you future headaches and potentially a great deal of money.
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