QuickBizBreak by david weaver

Take a quick break from your biz to ponder new ideas and strategies that will turbocharge your business.

Franchise Planning – Why Planning Your Exit is Critical to Growth and Profitability

Posted by QuickBizBreak on November 7, 2019

Last week, I wrote about the importance of long-term planning as it relates to succession planning. In our experience, long-term planning provides a proven benefit which is building value in your business. How you ask?

Succession planning covers a broad range of subjects which may be broadly categorized by legal, financial, and people. Each of these can be broken down into subsets such as estate planning, contracts and business structuring, personal and business finances, strategic planning, leadership development, strategy and performance, successor identification and development, and partner/family dynamics and governance. These can be even further broken down into more finite categories as each business is unique along with each owners’ perspective and motivation. Each of these many facets of succession are intimately woven together, interdependent upon each other’s outcome.

Value

A franchise operation is valued on a number of factors: tangible assets, profitability, the terms of the franchise agreement, location, allocation of goodwill between franchisor and franchisee, and many other factors. There are a number of criteria, however, that factor into how an operation is run, how employees interact with one another and the public, and how successful they are in running any one or multiple franchise locations.

Succession Factors Effecting Value

The easy answer is that all of the succession factors involved are key to driving value in the business. An Owner’s Motivation and Perspective shapes the culture of the business and helps determine their stewardship responsibility to employees, community, vendors, suppliers, and more. This sometimes is driven by the franchisor (Chik-fi-A comes to mind) yet others are driven more by the culture defined by local ownership and management. Personal Financial Planning determines whether an owner has, or will have upon sale, the assets to maintain their lifestyle without interfering with operations if there is a buyout arrangement or sale to a family member where they may be reluctant to hand over the reins. It also determines what happens upon the death of the owner by defining the codicils of wills and trusts in the estate plan.  Business Structuring defines the ownership structure, cash flow, liability protection, governance, and management control. Business Performance is an obvious component of business valuation but also to maintain productivity and profitability during a change of ownership or management. Strategic Planning provides detailed action agendas for the implementation of structure, processes, and people critical to fulfill long-term succession goals.

Leadership and Management Continuity addresses the need to identify, motivate and retain key leaders and managers who help drive the organization. Management Synergy and Teamwork addresses the need for collaboration of talented and motivated people to carry out the mission and vision of the company on a daily basis. Whether your franchised business is family-owned or with partners, the Family/Partner Dynamics and Governance addresses the relationships and communication necessary for the continuity of the business and in establishing the structure, operating policies (if not defined by the franchisor), and accountability required to maintain business and cultural success. Lastly, if not selling to an outside party, Successor ID and Preparation helps ensure that whether a family member, incoming business partner, or ownership team, ensures that they possess the capacity, commitment and competencies to continue driving the success of the business.

Now re-read the last two paragraphs through the eyes of a potential buyer. While some buyers look for under-performing franchise locations so that they can improve operations and add value, not everyone is a turn-around specialist. Note that the list of succession planning criteria goes well beyond operational efficiency. We have found that many, if not most buyers, view a business that has successfully addressed the extensive issues related to succession planning as outlined above, and continues to review and fine tune each of those criteria, represents a high-performing asset that will continue to operate effectively and profitably under new ownership. This is contingent upon maintaining the culture, management team, and the many other factors that contributed to the success, which of course is not always the case. The value of the business as it relates to the sale, however, remains more favorable than one that does not address these issues. And what if you don’t sell to a third party and instead mentor a family successor candidate or embrace some other closely held ownership scenario? That same process helps ensure the continued success of the business through the next generation of owners and managers. And that, as they say in the credit card commercials, is ‘priceless’!

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