Franchise Developments: Franchises must make a succession plan

Franchise Developments strongly recommend franchises take out a succession plan. They provide the following example as a case in point.

John was considered a success by nearly all who knew him. Through hard work his three franchises were making consistent profits and he had recently married his long-time girlfriend. By all accounts his future, and that of his wife, seemed assured.

However two weeks before his 40th birthday, John was given some bad news. He had a particularly aggressive cancer and was tactfully told by his doctors that he should “get his personal affairs in order”. John made the most of the time he had. He found a good adviser and with his help, put in place a succession plan that would ensure the needs of his family and his business were met. This included updating his will, putting in place a buy-sell arrangement with his business partners to ensure a clear transition in ownership, and he even ensured that his wife had the right authority to carry on business dealings with the bank. His wife had not been exposed to the business before and had to take over as John’s health failed. But John was, in another way, fortunate – because he had invested in his staff. Through training and developing his staff, he had ensured his businesses did not require his presence and his employees stayed when they were needed the most. This relieved his wife of much of the burden, while providing her with the security that the business would remain profitable.

This is a very sad story. However, John had something that others dealt with life’s cruellest blow sometimes do not. Time. John had enough time to make the necessary preparations to ensure his family were taken care of in his absence. And he had time to prepare his business for the time when he would no longer be there. As a business owner, are you prepared for the unthinkable? What would happen to your business if you were hit by the proverbial bus? Would it survive your not being there? And would your family be taken care of, should something happen to you?

The lesson

It is all too common for business owners to neglect to put in place the appropriate measures to protect themselves, their business and their loved ones from catastrophic personal loss. It is almost inevitable that a subject of such an unsavoury nature (surely ranking just above taxes) is easily lost in the noise of day-to-day business. Time pressures and our ability to dissociate ourselves from the distasteful (‘It won’t happen to me’) further conspire to keep it at arm’s length. Those of us who do confront the subject are faced with a multitude of insurance policies, deeds, wills, partnership agreements and so on. Invariably the momentum stalls and policy papers remain unsigned on the desk. However we explain our inaction, in the end it amounts to exposing our business, our business partners and those we love the most to a risk that can have serious and long lasting consequences.

Consequences

Business

Without a proper succession plan in place, a business that has relied heavily on the owner’s ongoing efforts could find its very survival in jeopardy. Your absence may create a void in key management skills and in critical areas of expertise such as marketing. These gaps will need to be filled quickly. Do you have the right people to step up and competently perform your role? Will critical relationships with suppliers and clients that you have personally built and nurtured over the years remain? If you don’t know the answer to these questions then there is a good chance the answer is no. The loss of the business owner can also have an impact on staff. An atmosphere of despair and uncertainty may settle into the workplace. Facing this, staff may seek work elsewhere, adding to the mounting business pressures.

Family

Then there is the enormous burden placed on surviving family members. It is not uncommon for family disputes to arise as a result of an outdated or nonexistent will or a general lack of planning. Additionally, in a time of great loss and associated grief, your spouse and even your children may be forced into the business to preserve their financial livelihood. If you have shielded your family from the business up until now, the learning curve will be steep. Facing the prospect of diminishing cashflows and outstanding loans that will likely not be met, lifestyle choices may need to be made, such as downsizing the family home or changing schooling arrangements for the children. On top of this is the real possibility of many years of indebtedness.

Business partners

With no clear transition plan, your business partner(s) and other shareholders can be left stranded. They may need to take on board additional roles that they may not be adequately equipped to perform. Investors may lose confidence and pull out. Restructuring of finances and ownership interests may lead to messy disputes involving both your business partners and your family. The business will invariably suffer under the emotional and financial strain. While these possibilities paint an alarming picture, it need not be devastating for those left behind. You can make decisions and put measures in place now that will minimise the impact of the unexpected.

Protective actions to take

Like John, there are some prudent actions you can take now to protect yourself, your business and your loved ones.

1. Structure of business/financial affairs. Maximise protection of key assets such as your home. Traditionally when small business owners think ‘asset protection’ they think ‘tax minimisation’, but you should also ensure you are preserving the value of your assets. While there is no universal strategy, the use of companies and family trusts and avoiding having all assets in one business structure are some important ways to protect assets.

You should also periodically review your business structure with your advisers to keep it current as circumstances change throughout your life.

2. Get your house in order. Prepare a will and ensure it is kept up-to-date. Appoint an executor who understands your wishes.

Prepare a business will if you have partners. This should provide clear, agreed guidelines for buying or disposing of ownership interests.

Consider taking out insurance policies on each of your partners, and them on you, so that any insurance payouts can be used to buy out the relevant business interest.

Notify business partners and your spouse of your trusted advisers such as solicitors, accountants, bankers, insurers and financial planners and of your dealings with them. If you are like most business owners, these will change from time to time. Keeping a current list and relevant files will ensure the information is available if it is needed. Keep contracts such as terms of trade agreements up-to-date and relevant and make sure you understand any provisions in your franchise agreement that cover the death of a franchisee. If you are an independent business owner, ensure any trademarks are registered appropriately and other intellectual property adequately protected.

3. Take out appropriate insurances. We often see insurances as a necessary evil, but they should be an integral part of your protection strategy. The following types of insurance may be relevant, but there are others that you should consider with your insurer:

• permanent disability

• death

• expense coverage

• ‘buy-sell’ agreements.

4. Train staff and delegate responsibility. Many business owners get overly caught up in the day-to-day running of the business. This can create a dependency on the owner that can stifle the development of staff into future company leaders. Investing in staff, through effective training and delegation, can reduce this dependence, and provide an insurance against the loss of important skills. You should expose staff to other aspects of the business. This allows them to develop an appreciation of the business as a whole, which is a critical requirement if they are to be expected to take on the broader responsibilities of management. With employees properly trained and performing key roles, the business can continue to operate profitably in your absence. And your staff may return your investment by staying on when they are needed the most.

5. Blueprints, systems and manuals. If you are a franchisee and don’t have an up-to-date franchisee operations manual, the knowledge you have gained in the business will be lost if you leave. If you are an independent business, you should invest in a company manual. Documenting the procedures and systems that make your business work well has many benefits. For example, it adds value to your business if you were to sell, improves the efficiency of staff training and, importantly in the context of this discussion, facilitates a smoother and more profitable transition to new management.

6. Business plans. Your business plan is your current view of the world and your plans for how you are going to tackle the challenges and take advantage of the opportunities in the next few years ahead. Your partners and staff should read it, your financial advisers and accountants need it and your bankers will insist on seeing it.

And you will want it for another reason. It is the powerful legacy you will leave that says ‘if I were still here, this is what I would do’. It is the most direct way that you will continue to guide your business after you have moved on.

Conclusion

While we have shown how you can plan to minimise the impact of your loss on your business, partners and family, at the end of the day you hope it won’t be something that will be needed any time soon! So here are some final tips that aim to help keep the grim reaper from your door. Get a thorough ‘executive health check’ from your doctor. Regular check-ups will help to identify any potential health problems early. Set aside a full day for this, as we are talking eight hours – it’s time and money well spent.

Lastly, maintain a balanced lifestyle. This means planning regular breaks, time with the family, etc. Easier said than done, but persevere. A well-earned break will refresh and invigorate, leaving you pumped up for the (hopefully) many happy business years ahead.

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