How Business Transition Planning Protects Both Franchisors and Franchisees
By Jane M. Johnson, President, Business Transition Academy, Inc., Co-Author of Cashing Out of Your Business – Your Last Great Deal
Individuals seeking business ownership are often attracted to franchises since they provide structure, support, brand recognition, training, and a proven track record. Without a franchise, new owners could invest years and substantial money in creating a business with a greater risk of potential failure. In fact, statistics show that franchises offer a much greater success rate than other types of new businesses.
According to the Bureau of Labor Statistics, about 20% of all businesses in the U.S. close after the first two years of operation(1) and a little over 38% after four years. Alternatively, 92% of franchises were still in business after two years, and 85% after five years, according to a study performed by franchise consulting firm FranNet(2).
All Business Owners Need to Plan for Their Exit:
Franchisees face the same succession and transition challenges that non-franchise business owners face.
According to the 2019 Small Business Trends survey from small business financing company Guidant Financial and online credit marketplace LendingClub Corporation:
- 62% of franchises are owned by baby boomers.
- 30% of franchises are owned by Gen Xers.
- Only 8% of franchises are owned by millennials.(3)
Similar to what we are seeing in the general small business market, there will be a glut of franchisees who will be looking to exit during the next decade. As a franchisor, the success, profitability, and continuity of your franchisees are of utmost importance. After all, they build brand equity, provide a royalty stream, and help “seed” franchise growth.
Most small business owners, including franchisees, do not have a Business Ownership Transition Plan, a contingency plan, or a leadership succession plan in place. This puts the franchisee and the franchisor at great risk. The franchisee risks losing what is most likely his or her largest asset, and the franchisor risks losing the location and revenue stream.
Most owners believe they will just sell their location to a third party, cash out, and move on. While a franchise may be more desirable to a new entrepreneur than a non-franchise for all of the reasons we stated above, it may not be possible to sell if the owner and the business are not properly prepared. In fact, as a huge number of baby-boomer business owners seek to cash out and retire, the number of all businesses on the market will continue to increase, franchise and non-franchise alike. As a result, all sellers may face a very tough market, and many will not be successful in selling. This could result in large numbers of franchises being returned to franchisors, who have to resell and re-establish the locations. This can cause loss of revenue and damage to the brand in the local markets, which may be difficult to overcome.
What about other sudden life events, such as illness or disability? While most franchisors insist on personal involvement by the franchise owner, this provides little protection if the franchisee experiences an unexpected life event. This can have a dramatic and quick negative impact on the location. Franchisors rely on successful locations as a platform for selling new locations and increasing profitability. It may take years for a location to fully develop and provide a healthy sustainable royalty stream and brand equity. Sudden franchise failures could have a very negative impact on the system.
So what can be done to mitigate the risk to both the franchisee and the franchisor? We strongly believe that all businesses, regardless of size, should have a comprehensive written ownership transition plan, which also includes a contingency and succession strategy. This ensures that the franchisee has a way to protect his or her business from the unexpected and provides a roadmap to leave the business on the franchisee’s terms. If planning is done in advance, transfer options will likely include an external sale and an internal transition to family or employees. An integrated, written plan is essential to ensuring that the franchisee’s goals and objectives are met and the business continues without interruption.
How Business Transition Planning Benefits Franchisors:
This planning obviously provides the franchisor with benefits as well:
- A franchise that continues to thrive without disruption
- An uninterrupted royalty stream
- The public perception of a strong desirable franchise
- Ability to focus on adding new franchise locations instead of saving existing ones
Franchisors can be proactive and protect themselves by offering their franchisees access to transition planning tools and resources in order to improve their chances for a successful transfer of ownership.
We believe that all business owners should plan for their ownership transition at least five years in advance and have a contingency plan in place, starting on day one, in order to protect their wealth and ensure their business continuity. If the business is a franchise, this planning will provide a double benefit by also protecting the franchisor. Time marches on, and the time for this planning is now!
Cashing Out of Your Business, co-authored by BTA President Jane M. Johnson and written especially for business owners, introduces the concept of business ownership transition planning. It outlines a roadmap that may be used by ALL owners to analyze their current situation, determine their goals and design a Business Ownership Transition Plan that is custom to their needs.
Visit www.BusinessTransitionAcademy.com to find all the information and training you need to create your own, custom Business Ownership Transition Plan. You can also register for a free membership and have access to great exit planning resources.
Franchise Flippers thanks Jane M. Johnson for contributing this article and sharing their expertise in the franchise space. Franchise Flippers is the premier franchise resale marketplace and resource center. We are dedicated to helping franchise buyers and sellers connect and get deals done. Visit us at www.franchiseflippers.com and learn how we can help you.
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