Succession Planning for Franchisors
By Jane Garber, Senior Associate, Mason Sier Turnbull
All business owners must create and put in place a strategy for one day exiting their businesses. This strategy is widely known as succession planning. Succession planning is about dealing with the inevitable – death or retirement. However, factors such as illness, disputes with business partners, bankruptcy or an offer simply “too good to refuse” may drive the need to exit a business.
It is important for business owners to plan ahead for this and to make an early assessment of possible options.
It is imperative that suitable company structures, documentation – partnership and shareholder agreements, buy/sell agreements and trust documents are put in place from the outset to ensure the business owners can exit the business in a tax effective manner and to protect the remaining owners in the event of an unplanned exit of one of the owners from the business. Business succession also needs to be co-ordinated with estate planning.
Wills need to reflect or be consistent with business succession plans (a spouse or an executor may inadvertently be able to control or have (unwanted) input into the operation of the business).
Trust deeds need to deal with the passing of control of the trust to the right person.
Shareholder and partnership agreements are critical. An agreement called a buy/sell agreement controls what happens if shareholders or partners exit a business – i.e. a shareholder or partner dies, is disabled or is otherwise incapacitated or retires. Commonly, buy/sell agreements, whether separate agreements or incorporated into the shareholder or partnership agreement itself, set out what events will trigger a buyout of the departing shareholder or the partner’s share in the business, and rules about who can buy it.
Buy/sell agreements can also be backed by insurance policies to guarantee that there will be enough money to keep a business afloat when a buy/sell event is triggered and to ensure remaining shareholders and partners have the funds to buy the exiting shareholder’s and partner’s interest.
For all business owners succession planning means ensuring that the business is “ready for sale” at any point in time and this will require undertaking an audit or a due diligence of the business. Such due diligence is vital because a purchaser is more likely to pay a premium for a business (or is less likely to seek a reduction to the purchase price of the business) where the business has the following attributes:
- well drafted and documented systems, policies and procedures;
- a skilled and competent workforce that can operate the business in the absence of the business owners;
- the business does not require substantial upgrade to equipment, IT systems and infrastructure;
- up to date, accurate, easily accessible financial information and books of account;
- up to date easily accessible employee records; and
- formal properly documented material arrangements, specifically written and legally binding supply agreements with key suppliers and key employees formally engaged with the business by way of employment agreements.
The due diligence process should involve an audit of the above on a regular basis and if deficiencies are found, dealing with the deficiencies and committing the time and effort to rectify the deficiencies. It will be too late to deal with the deficiencies if they are identified by the purchaser who may walk away or seek a reduction in the purchase price.
For a franchisor wanting to sell a franchise network due diligence should also involve:
- confirming whether all relevant intellectual property is properly registered. The franchisor’s logos, brand names and tag lines should be registered as trademarks. Any product or packaging designs unique to the franchise network may be able to be protected. In some cases, a patent may be able to be obtained and give the franchisor the sole right to make, use and exploit the particular invention for a period of time;
- ensuring all franchisees have entered into franchise agreements with the franchisor and these agreements are current and easily accessible to a purchaser for their own due diligence purposes; and
- where the franchise network operates from fixed outlets or stores, ensuring that premises leases are in place and valid and where relevant, that all franchisees have entered into occupancy licences or subleases with the franchisor which remain valid.
Some succession tips:
- Surround yourself with a team of proactive financial and legal advisers who will work collaboratively to assist you in setting up the correct structures and necessary agreements and documents from the outset.
- Meet regularly with your advisers to review your current legal and financial position and demand proactive advice.
- Identify your succession goals – protecting your wealth, providing continuity and ensuring the ongoing success of the business, providing for future generations or a combination of each of these.
- Co-ordinate business succession planning and estate planning to achieve your succession goals.
- Review and update your succession goals. If your plans change, further advice may be needed and your documentation may need to be updated.
The key to succession planning is always striving to keep the business in a “sale ready” condition in order to maximise the price a purchaser is willing to pay and make it easy for the business to be sold on short notice (if necessary or desirable).