In Short
- Assess the size and complexity of your franchise to identify key roles that require succession planning.
- Plan for different scenarios, such as retirement, disability, or disputes, and ensure your franchise systems are adaptable.
- Review your franchise agreement for clauses related to succession to understand the procedures and options available.
Tips for Businesses
Regularly review your succession plan with legal and financial advisors to ensure it aligns with your franchise agreements and business strategy. Clearly define the process for selecting and training successors, and make sure all stakeholders are informed and prepared for potential transitions.
As a business owner, building a successful franchise network can take years. However, having a succession plan ensures that everything you’ve built is protected and secure. Franchise succession planning often involves more than anticipating death or retirement. Often, franchise succession planning will consider cases where the franchisor becomes disabled, has a dispute with a business partner or reaches the end of their franchise agreement. This article will discuss some key considerations franchisors and franchisees must make when franchise succession planning.
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Asking The Right Questions
Firstly, you should consider the size of the franchise network to determine how many roles you must fill. Large franchise networks have several moving parts. Often, a wealth of talent is already working in various capacities within the network. However, a smaller franchise network faces obstacles, and no one can assume a successor is capable of running the business.
It is essential to think ahead when you visualize your business at its peak. For instance, will the current economic landscape impact your business in the foreseeable future? Consider your options if the business is operating at its best. Are the systems and processes of your particular franchise well-defined and resilient?
Another essential consideration you should discuss with your lawyer is the time it may take to sell the franchise upon retirement. Consider which skills and attributes enable you to perform so well. Additionally, you might think about who is most suited to fill your shoes and take over the role.
Planning In Advance
Various aspects of the franchise network offer insights into what’s required for effective succession planning. For instance, the franchise network’s executives indicate the company’s existing competencies concerning leadership needs and the industry in which it competes. This rolls over to the employees, who are evaluated and assessed to determine how they match the business’s current needs. Additionally, employees receive consistent training and mentoring to match personnel recruitments and future needs. Finally, you must have efficient management and human resources programs in place. This provides visibility across the business.
When you retire, it is pretty standard for family disputes to arise. This is because the day-to-day operations of the business and the rights to business earnings become contentious. For example, in a partnership, each party must agree on how each partner may exit the partnership. This process ensures fairness, so the same rules apply to each partner. Usually, the Partnership Agreement will cover these details.
Continue reading this article below the formThe Franchise Agreement
A lot of the time, franchise agreements specify the time restrictions a franchisee is permitted to be away from the franchise business. In addition, the time restriction will usually detail the time limits for a replacement to operate the franchise in the franchisee’s absence.
Franchisees are also limited in their capacity to affect the sale of the franchised outlet. To ensure the system provides the most protection, franchisors usually have the first right to purchase (or buy back) the business. Further, they have a reserved right to approve or disapprove the prospective franchisee.
Moreover, the franchisor may want to:
- look over the proposed contract of sale;
- revise the transfer of the interest in the franchise; and
- approve any prospective incoming franchisees.
Likewise, any internal restructuring will mean that the franchisee must comply with the clauses in the franchise agreement. This might include clauses relating to unforeseen events or an important employee unable to continue working because of an illness or death.
What to Consider Next
There are several key considerations when planning your post-franchise commitments.
Obtaining Legal and Financial Advice
Seeking guidance from experienced legal and financial professionals is crucial when planning your franchise succession. These experts can assist you in navigating the complexities of the franchise agreement, ensuring legal compliance, and offering insights on tax implications, valuation, and funding options. Together, legal and financial professionals can help you make informed decisions and maximise the value of your franchise.
Assessing Your Responsibility in the Franchise Business
Before any succession of the franchise business occurs, it is important to understand your current responsibilities and how your absence might impact the franchise. Consider key areas such as your role in daily operations, decision-making processes, and significant relationships with employees, customers, and suppliers. Doing so allows you to pinpoint areas where your successor may require further assistance or training, ensuring a smooth transition for the franchise business.
Choosing a Successor
Choosing the right successor is crucial. Consider family members and an existing manager who has the necessary skills, experience, and determination to lead the business. Once you have selected a successor, invest in their training and development to ensure they’re well-prepared for the role.
Satisfaction of Preconditions to Transfer
Franchise agreements often include specific preconditions to be met before ownership can be transferred. These may include minimum tenure requirements, performance metrics, or approval from the franchisor. You or your lawyer should carefully review your franchise agreement to identify the preconditions and understand how they can be satisfied.
Being Able to Proceed With the Franchise Sale in a Short Time Frame
Once you have laid the groundwork for your succession plan, it is essential to be prepared to execute the sale efficiently. Streamline the process by gathering necessary documents, such as:
- financial statements;
- contracts; and
- inventory records.
Work closely with your legal and financial advisors to help facilitate due diligence and negotiations. Ensure timely completion of the sale while protecting your interests.
Key Takeaways
As a franchise owner, it is crucial to think ahead. Unfortunately, there is no sure way of knowing what issues your business will face. However, having a franchise succession plan ensures that everything you’ve built is protected and secure. Some key considerations franchisors and franchisees should make include:
- the size of the franchise network;
- the time it may take to sell the franchise;
- the company’s existing competencies concerning leadership needs and industry competition;
- terms under the franchise agreement (for instance, time restrictions); and
- post-franchise commitments, including choosing a successor.
If you need assistance or legal advice concerning franchise succession planning, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
It would help if you considered speaking with an experienced franchise lawyer about exit clauses and what will happen in unforeseeable circumstances.
‘Buy’ and ‘sell’ agreements can assist in the occurrence of an unforeseeable event. For instance, if a partner retires or leaves unexpectedly, the other partners will have some assurance that the departing partner’s interest can be bought out using insurance policies.
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