Franchise Succession Planning and Transfers · · 2014-12-23Franchise Succession Planning and Transfers A Best Practices Handbook ... THE SALE AND TRANSFER OF THE FRANCHISE ...

FranchiseSuccession Planning and TransfersA Best Practices Handbook

Published by the

International Franchise Association1501 K St., NW, Suite 350Washington, DC 20005 USATel: +1 202 628 8000www.franchise.org

Franchise Relations CommitteeBarb Moran, ChairSuccession Planning And Transfers Task ForceWilliam Slater Vincent, Co-ChairKeith Miller, Co-Chair

Revised Spring 2010

IFA Franchise Succession Planning & Transfers Handbook

FOREWARD ...................................................................................................................................................IABOUT IFA ....................................................................................................................................................IIIFA FRANCHISE RELATIONS COMMITTEE .................................................................................................. III

I. SUCCESSION PLANNING

A. INTRODUCTION................................................................................................................................................................. 1B. WHYASUCCESSIONPLANISNEEDED............................................................................................................................... 2C. THESUCCESSIONPLAN..................................................................................................................................................... 3

i. DevelopTeamofAdvisors...................................................................................................................................... 3ii. IdentifyQualitiesSuccessorMustPossess................................................................................................................. 3iii. IdentifytheSuccessor............................................................................................................................................ 3iv. TraintheSuccessor................................................................................................................................................ 4v. FinalThoughts–Legal&TaxIssues.......................................................................................................................... 5

D. CONCLUSION................................................................................................................................................................... 5

II. THE SALE AND TRANSFER OF THE FRANCHISE

A. INTRODUCTION................................................................................................................................................................. 6B. EXITSTRATEGY................................................................................................................................................................... 6

i. SellingtoanOutsider............................................................................................................................................. 7ii. MarketabilityoftheFranchiseBusiness...................................................................................................................... 7iii. ValuationoftheBusiness......................................................................................................................................... 8iv. ValuationMethods.................................................................................................................................................. 8v. SellingtoanEmployee............................................................................................................................................ 8

C. THETRANSFERPROCESS.................................................................................................................................................... 9i. LocatingProspectiveBuyers................................................................................................................................... 10ii. Approval/DisapprovalProcess............................................................................................................................... 11iii. TheImportanceofEstablishingaTransferPolicy....................................................................................................... 11iv. APerfectWorldTransferScenario.......................................................................................................................... 12v. WhatNormallyHappensintheTransferScenario.................................................................................................... 13vi. LocatingBuyers.................................................................................................................................................... 13vii. UnqualifiedCandidatesinTransfers........................................................................................................................ 14viii. TransferFees........................................................................................................................................................ 14

D. TRANSFERDOCUMENTATION........................................................................................................................................... 15i. Documentation..................................................................................................................................................... 15ii. ConsenttoTransfer............................................................................................................................................... 16iii. ApplicableStateLaws........................................................................................................................................... 16iv. Disclosure............................................................................................................................................................ 17v. TransferProcedures............................................................................................................................................... 17

E. TRAININGANDOPERATIONALSUPPORTFORTRANSFEREES............................................................................................... 18i. DifferencesComparedtoaNewFranchisee............................................................................................................ 18ii. ComplianceReviewatTransfer.............................................................................................................................. 18iii. InitialTrainingPrograms........................................................................................................................................ 18iv. On-SiteVisitations................................................................................................................................................. 19v. HowtoGetNewTransfereesUp-To-SpeedOperationally.......................................................................................... 19vi. MentorPrograms.................................................................................................................................................. 20

F. CONCLUSION................................................................................................................................................................ 21

Table of Contents

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II


Foreword

Sellingandtransferringownershipofafranchisedbusinessissomethingthatmanyfranchiseesdonotthinkaboutuntiltheyareatthepointwheretheyareretiringorreadytoselltheirbusinesses.Manypeoplemistakenlyassumethisisasimpleprocess,buttherearemyriaddecisionstomakebeforeafranchisedbusinesscanbesoldandownershiptransferred.

Perhapsthebestwaytoprepareistocreateasuccessionplan–anadvancestrategythatmapsouthowafranchiseeplanstoremovehimselffromthebusinessinthefutureandtransferittoanewfranchiseeowner,whocouldbeafamilymemberorathirdpartybuyer.

Thishandbookprovidesablueprintforestablishingasuccessionplanalongwithalistofdecisionstobemadeintheplanningprocess.

Sellingandtransferringownershipofthebusinessnotonlyaffectsthefranchisee,butalsothefranchisor.Onesectiondiscusseshowfranchisorscanworkwiththeirfranchiseestofindasuitablebuyerfortheirfranchise.Havingaplaninadvancewillmakethissometimesemotionallydifficultprocesseasiertoexecute.

Franchise Succession Planning and Transfers

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About the International Franchise Association

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TheInternationalFranchiseAssociation,theworld’soldestandlargestorganizationrepresentingfranchising,isthepreeminentvoiceandacknowledgedleaderfortheindustryworldwide.Currentlycelebratingahalf-centuryofservicewithagrowingmembershipofmorethan1,100franchisesystems,10,000-plusfranchiseesandmorethan500firmsthatsupplygoodsandservicestotheindustry,IFAprotects,enhancesandpromotesfranchisingbyadvancingthevaluesofintegrity,respect,trust,commitmenttoexcellence,honestyanddiversity.

IFA Mission

Protect,enhanceandpromotefranchising

IFA Vision

Thepreeminentvoiceandacknowledgedleaderforfranchisingworldwide

IFA Strategic Priorities

• Governmentrelations• Publicrelations• Educationandprofessionaldevelopment

IFA Values

Integrity• Infusinghighethicalstandardsintoallefforts

Respect• Showingthoughtfulconsiderationforallmembers,staffandotherswithwhomwework

Trust• Faithfullyfulfillingourresponsibilitiestomembers

Excellence• Deliveringhighqualitycontentandprogramsthatpropelfranchisingforward

Diversity• Embracingthediversityofindividuals,ideasandperspectives

Formoreinformation,visittheIFAWebsiteatwww.franchise.org.


TheIFA’sFranchiseRelationsCommitteeisdedicatedtodevelopinginformationandprogramsthatpromotepositiverelationsandencouragedialogueandcooperationbetweenfranchiseesandfranchisors.ForadditionalcontentproducedbytheFranchiseRelationsCommittee,pleasevisitwww.franchise.org/franchiserelations.aspx.BarbMoran,MoranIndustries,Inc.Chairman

BarryMiller,SylvanLearningCenterofGirard,OhioVice-Chair

KeithMiller,SubwayFranchiseeVice-Chair

Michael Bamrick, CFE,JackInTheBox,Inc.Bruce Bloom, CFE,Bloom&Associates,LLCJoe Bourdow, CFE,ValpakSteve Bridge,CaliforniaFreshofLompoc,CAMary Beth Brody, CFE,Faegre&BensonLLPJanice Dwyer, CFE,Luce,SmithandScott,Inc.Paul Eckert,FamilyFinancialCenters,LLCDonald Higginson,MBE,aUPSCompanyHarvey Homsey,ExpressEmploymentProfessionalsKen Houck, CFE,GoldenCorralBuffet&GrillChuck Jones, CFE,HouseMasterHomeInspectionServicesJohn Kujawa,McDonald’sCorporationPaul Mangiamele, CFE,Salsarita’sLisa McCarthy,OutOfTheBoxTechnologyCatherine Monson,FASTSIGNSInternationalRay Moore, CFE,BrightStarFranchising,LLCJack Pearce, CFE,AnnexBrands,Inc.Andrew Perrin,LarkinHoffmanDaly&LindgrenSteven Rafsky,PadgettBusinessServicesRobert Sells, CFE,SellsDevelopment,Inc.Linda Shunk, CFE,OreckFranchiseServices,LLCTim Shuy,ChoiceHotelsInternationalKeith Singletary,Chick-fil-ACapitalCentreJim Squire, CFE,HoneyBakedHamCompanyandCaféEric Stites, CFE,FranchiseBusinessReviewLarry Tate,GoldenCorralBuffet&GrillWilliam Vincent,LifeUniversity;FootSolutions,Inc.David Wells, CFE,Snap-on-ToolsCompany,LLC

IFA Franchise relations Committee

III


A. INTrodUCTIoN

America’sbusinesscommunityisbuiltuponfamily-ownedbusinesseswhichincludesfranchises.Morethan90%ofallbusinessesintheUnitedStatesarefamily-ownedandemploy62%oftheprivatesectorworkforce.Two-thirdsofthenation’sGrossDomesticProductisproducedbyfamily-ownedbusinesses.Further,overthelast20years,morethan80%ofthenetnewjobscreatedintheUnitedStatedwerecreatedbyfamily-ownedbusinesses.Alargenumberoffamily-ownedbusinessesarefranchisebusinessesofwhichover900,000existtoday.

Unfortunately,statisticsarenotverygoodaspertainstothecontinuationoffamily-ownedandfranchisebusinesses.Almost70%ofallbusinessesfailtosurvivetothesecondgeneration.Ofthosethatdosurvive,only12%makeittothethirdgeneration.Aconsiderablenumberoffranchisedbusinessownerswouldliketomaintainownershipoftheirfranchisesafterretirement.However,forseveralreasonsthisdoesnothappenin70%ofbusinesses.Oneoftheprimarycausesofafamilybusinessnotstayinginthefamilyisthefailuretocreateandexecuteamanagementsuccessionplan.Othermajorreasonsincludeinadequateestateplanning,andthesubsequentlackoffundstopayestatetaxes.

Mostbusinessownerswanttheirbusinessestosurvivethemandthevastmajority,exceeding80%,wanttopasstheirbusiness,orfranchises,ontotheirchildrenorotherfamilymembers.However,thenumberonereasonthisdoesnotoccurisduetothelackofaviablesuccessionplan.Therefore,inordertoensurethecontinuityofownershipbythefamilyofafranchise,asuccessionplanmustbedevelopedandimplemented.

I. SUCCeSSIoN PLANNING

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In order to ensure the continuity of ownership by the family of a franchise,

a succession plan must be developed and

implemented.


B. wHY A SUCCeSSIoN PLAN IS Needed

Approximately70%offamily-ownedfranchiseswillnotsurvivetheretirementoftheoriginalownerwithoutasuccessionplaninplace.Therearemanyreasonswhytheownermaynotbeabletocontinuetooperatethefranchiseandneedstohaveareplacementwaitingtotakeover.Forexample,oneneverknowswhenhemaydieorbecomephysicallyincapacitatedduetoanillness.Also,therearelegalandfinancialproblemsthatcanariseinwhichtheownerneedstobeimmediatelyreplacedbyasuccessor.Therehaveevenbeencaseswheretheownerhas,withoutnotice,walkedawaybecausehehadhadenoughandwantedtogointoimmediateretirement.However,atsomepointintimeasuccessorwilltakeoverfortheoriginalownerofthefranchise.Andthepointis,oneneverknowswhenthatsuccessorwillneedtotakeover.Aswehavealwaysbeentaught,anounceofpreventionisworthapoundofcureandthereforeitisofextremeimportancetohaveasuccessionplaninplaceiftheownerofthefranchisewantstomaintainownershipasopposedtotransferringittoanother.

Thereareseveralcompetinginterestswhentheownerdoesneedtoretire.Ifmembersofhisfamilyarealsoemployeestheymightfeelliketheyshouldbethesuccessor.Also,iftheownerhasseveralchildreneachofthemmayfeelthattheyshouldbeputinchargeofthefranchise.Additionally,therearenon-familyemployeesthat,becauseoftheirlengthofserviceorimportancetothefranchise,wanttobecomethesuccessortotheowner,oratleastobtainastakeinthefranchise.Evenwhentherearenofamilymembersoftheowneractivelyinvolvedinthefranchise,therecanstillbepressureappliedbecausethesefamilymemberswanttoensurethattheywillendupowningthebusinessifsomethingshouldhappentotheowner.Forthesereasonsandothers,aneffectiveandcompletesuccessionplanneedstobeimplementedbyeachfranchiseownertoensurethecontinuedsuccessofthefranchiseintheeventtheoriginalfranchiseownerisnolongerabletoorwillingtoleadandoperatethefranchise.

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Approximately 70% of family-owned

franchises will not survive the retirement of the original owner without a succession

plan in place.


C. THe SUCCeSSIoN PLAN

(i) DEVELOP TEAM OF ADVISORS

Thefranchiseownerneedstocontrolthesuccessionplanfrombeginningtoend.Afterall,itishiscompanyandthereforeneedstocontrolthemanagementcontinuitystrategy.Theownercanselecttodothisinoneoftwoways.First,theownermightdecidejusttoworkwithselectedmembersofhisorherfamilyandallowimmediatefamilymemberstoactivelyparticipateinhelpingtheownerdecideuponasuccessor.Second,theownermightdecideitisadvisabletobringinprofessionaladvisorssuchasanattorneyorbusinessexpertsinhisindustrythatknowwhatqualitiesareimperativeforasuccessortohavetobeasuccessfulreplacementoftheowner.Regardlessofwhatapproachistaken,itisadvisabletocontactthefranchisoranddeterminewhathelpthefranchisorofferswithregardtotransfers.Oftentimestheownerwillfinditbeneficialtocombinebothstrategiesandselectasuccessorbaseduponinputfrombothhisimmediatefamilymembersandprofessionaladvisors.

(ii) IDENTIFY QUALITIES SUCCESSOR MUST POSSESS

Oncethefranchiseehashisteamofadvisorsinplacehemustidentifythosequalitiesthathissuccessormustpossessinordertosuccessfullyrunandoperatethefranchise.Manyfranchisorsrequirecertainqualificationsofasuccessortotheexistingfranchisee.Dependinguponthetypeoffranchise,therecouldbesomeveryspecificandhighlytechnicalqualitiesthatmustbepossessedbyapotentialsuccessor.Suchqualitieswouldbeascertainedbythefranchisee,hisadvisors,andthefranchisoraspartofhissuccessionplan.However,therearemanyqualitiesthatthesuccessormustpossessthatarecommontoallfranchises.Forexample,thesuccessormustqualifyasafranchiseeandhaveacompleteknowledgeofthebusinessheorsheistorunandoperate,oratleasttheabilitytoacquirethisknowledgewithinanacceptabletimeframe.Further,thesuccessormustpossessthetraitsofenthusiasm,persistence,determination,willingnesstolearn,andbasicintellectualcapacity.Otherqualitieswouldincludetheabilitytoplanandorganize,abletosolveproblems,aneyefordetail,alongwithgoodhealth,plentyofenergy,andagung-hoattitude.

(iii) IDENTIFY THE SUCCESSOR

Oncethefirstandsecondstepsofthesuccessionplanhavebeencompleted,itisnowtimetoidentifypotentialsuccessors.Oftentimes,thefranchiseewillassumethathischildrenwillwanttotakeoverthebusinessandbethesuccessor.However,theownerofthefranchisemustidentifytherightsuccessorforhisbusinesswhetherornotitisoneofhischildrenoranotherfamilymember.

Thefranchiseeshouldmakeitcleartoeachofhischildrenandotherfamilymemberswhetherornotheorsheisrequiredtojointhebusinessonafulltimebasis.Also,itmightbeappropriatetogivethepotentialfamilymembersuccessortheopportunitytoworkoutsidethebusinessfirsttogainvaluableskillsinotherbusinesssettings.ThisisdonebyChick-fil-Awiththegrandchildrenofthefounder.Thefranchiseemustrealizethatthesuccessormayormaynotcomefromwithinhisorherfamily.Further,itispossiblethat,iftherearetwostrongcontendersforsuccessors,thefranchiseemayworkwithbothofthemtobehissuccessorandbothmayberesponsiblefortheeffectiveoperationofthebusinessuponhisretirement.

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Thetwomainreasonsfranchiseesdonotputasuccessionplanintoplaceorgiveitmuchthoughtisbecauseone,theyfeelliketheyhaveplentyoftimetodosoandtwo,thattheymightoffendfamilymembersiftheypickoneoveranother.However,itisinterestingtonotethattheaveragelifespanofafamily-ownedbusinessis24yearsandthatisalsotheaveragetimetheoriginalownerisatthehelmofthefranchise.However,neverknowingwhatwillhappentomorrow,itisalwaysimportantearlyoninthelifeofafranchisebusinesstohaveasuccessionplaninplacesothatsuccessorscanbegroomedbecausetheymaybeneededsoonerthanlater.

(iv) TRAIN THE SUCCESSOR

Nowthatthesuccessorhasbeenpicked,andassuminganylegalmattersaretakencareof,thefranchiseemusttrainthesuccessorbytransferringhisknowledgetohimgraduallyovertime.Dependinguponthefranchise,theownerwillneedatransitionperiodofonetothreeyearstoadequatelytrainhissuccessor.Thesuccessormustfollowasuccessionplanthatincludeseducationaboutthebusiness.Thismayincludeattendingtherequiredfranchisortrainingcourse(s)andworkingwiththecurrentownertolearneverythingthereisaboutthebusiness.Thesuccessormustgettoknowthefranchise’smostimportantcustomersalongwithitskeysuppliers,vendors,andotherpeopleinbusinessesthathavecontributedtothesuccessofthefranchise.Thefranchiseemustconveythekeyfactorsthathefeelshasledtohissuccessandthosekeyfactorsthathefeelswillleadtosuccessinthefuture.Asmuchaspossible,thefranchiseemustdocumentallofhisknowledgeandprocessessothatthesuccessorwillknowhowthingsaredoneandwhy.Muchofthisknowledgeisalreadycontainedintheoperationsmanualprovidedbythefranchisor.However,theownerwillstillcontributemuchknowledgeinthesuccessfuloperationofthefranchisethatisnotcontainedintheoperationsmanualandothermaterialsprovidedbythefranchisor.

Graduallythefranchiseemustshowhistrustinhissuccessorbydelegatingmoreandmoreresponsibilitiestohim.Theownermustrealizethatthesuccessormaymakemistakesfromtimetotimeandneedstobetheretoassistincorrectingthemistakesandturnthemintolearningexperiences.Further,theownerneedstoprovidehisorhersuccessorwiththeappropriatedocumentsthatarerequiredtoefficientlyoperatethefranchise.Thesedocumentsincludesuchitemsasfinancialstatements,insurancepolicies,keycontracts,corporateand/orotherbusinessdocumentsthatdictatehowthebusinessistoberun,alongwithsharingallfranchisormaterialswiththesuccessor.

Initiallythesuccessorwillshadowthefranchiseeandjustwatchthefranchisee.Graduallytheownerwilldelegatemoreandmoreresponsibilitiestohissuccessorsothathecaneffectivelytrainhim.Also,thistransitionperiodallowsfornotonlytheotheremployeesofthefranchisebutalsoforthefranchisee’scustomers,suppliers,andvendorstodevelopconfidenceinthesuccessoraswell.Theendresultisthatallpartiescometoidentifythefranchisewiththesuccessorasopposedtotheoriginalowner.

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(v) FINAL THOUGHTS – LEGAL AND TAX ISSUES

Finally,thesuccessionplan,aspartofthefranchisee’sestateplanning,mustbestructuredinsuchawayastominimizetheimpactofestate,gift,andinheritancetaxesonfamilymembersandthebusiness.Franchiseownerswhofailtoconsiderthepotentialimpactofestateandinheritancetaxescouldeasilyforce,upontheirpassing,theirremainingfamilymemberstosellthebusinessinordertopaytheestate’staxbill.AtthispointitiscriticaltohaveataxattorneyandaCPAwhospecializesintaxestodeterminewhichvehiclesarebestinordertominimizethesetaxes.Severalitemsthatcanbeutilizedinordertodothisareitemssuchasfamilylimitedpartnerships,anestatefreeze,varioustypesoftrusts,lifetimegifting,andbuy-sellagreements.Thefranchiseemustcovertheseissueswithcompetentlegalandtaxcounselandanyfurtherdiscussionofthesetypesoflegaloptionsisbeyondthescopeofthishandbook.However,beforetheowneroffranchisecandeterminewhichoptionstoutilizefromalegalandtaxperspective,hemustfirstcheckwithhisfranchisorinordertodetermineifwrittenpermissionisneededfromthefranchisorinorderfortheownertoparticipateinoneoftheselegalstrategies.Afterall,thefranchisorwillwanttoknowwhatisgoingonandwillwanttoreviewwhateverisdonebeforeitisdoneconcerningtheseitems.

d. CoNCLUSIoN

Afranchiseowner,uponpurchaseofafranchise,shouldalreadybeimplementingasuccessionplan.Oneneverknowswhenasuccessorwillhavetotakeoverlongbeforeexpected.Therefore,itisalwaysbettertobeproactivethanreactive.However,notallfranchiseownersarelookingtodevelopasuccessionplanbecauseforwhateverreasontheyhavealreadydecidedtheywillsellthefranchisetoathirdparty,whichcouldincludeafamilymember.Therefore,forthosesituations,thesecondpartofthishandbookcoversthesaleofabusiness,whichunderfranchisingisreferredtoastransfers.

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one never knows when a successor will have to take over long before expected.

It is always better to be proactive than reactive.


A. INTrodUCTIoN

Entrepreneursrarelytakethetimetoconsiderhowtheyaregoingtohandle‘theend’atthestart-uporduringthelifeofabusiness.Littlethoughtisgiventotheimplicationsofatransferorsuccessionofafranchisedbusinesswithathoroughreviewoftheapplicablefranchisedocuments.

Formanyentrepreneurs,itisdifficulttoconsiderthedissolutionofthefranchiseattheonset.Manychoosetooptimisticallyfocusonthebenefitsandpotential.Evenifaclearunderstandingexistsinitiallyabouttheprocessandproceduresforatransferorsuccessionofthefranchise,itisrarelyrevisitedorreconsideredduringthelifeofthebusiness.

Onlyontheoccasionofasignificanteventlikeanillnessorretirementdoestheissuegettheattentionitdeserves.Andtheresultisalltoooftenlesssatisfyingthanitmighthavebeenifaprocesstoexitthesystemhadbeenclearlydocumentedandagreeduponatthebeginningofthefranchiserelationship.B. eXIT STrATeGY

Animportantpartofanysuccessionplanistheexitstrategyforthefranchiseowner.Disability,retirement,death–theseareallissuesthatmustbeplannedforandaddressed.Thetimingofatransitiondependsonanumberoffactors,suchasthefranchisee’sage,health,retirementgoals,andthereadinessofabuyer/successor.Thefranchiseemustconsiderwhethertomaintainsomeinvolvementwiththebusinessormakeacleanbreak.

Thefollowingarepotentialnon-familysuccessorsinthesaleofyourbusiness:

a. anoutsiderb. anexistingemployeeandpossiblyretainingpartial ownershipc. aselectgrouportoallofyouremployees

II. THe SALe ANd TrANSFer oF THe FrANCHISe

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For many entrepreneurs, it is difficult to

consider the dissolution of the

franchise at the onset.


Ofcourse,allthreeofthesearesubjecttothefranchiseagreementtermsandprovisionsconcerningrenewal,termination,repurchase,modificationandassignmentofthefranchise.Therearecontractrestrictionsonthefranchisee’srighttofreelytransferthefranchise.Thesecontractlimitationsaresometimesalsosubjecttoseparatestatelegislation.

Thesestandardfranchiseagreementprovisionsenablefranchisesystemstoenforcehighqualitystandardsandensureuniformity.Failuretocomplywiththeserestrictionsgenerallybecomescausefordefaultandterminationoftheagreementandexposesthefranchiseetotheriskofendingupwithnofranchiseatall.Soitisofutmostimportancetomakeallplanswithinthescopeoftheappropriateprovisionsofthefranchiseagreement.

(i) SELLING TO AN OUTSIDER

Theoutsiderchallengeisidentifyingsomeoneinterestedinandfamiliarwithyourbusiness,thenqualifyingthembothoperationallyandfinancially,andmatchingtheirpersonalityandskillsettothefranchiseconcept.

Oneexampleisavendororsupplierpreparedtomoveintobusinessownership.Akeysupplieroficemachineswithalongworkingrelationshipwitharegionaldistributorenjoyedtheend-usercustomercontactsomuchthathepurchasedthebusinesswhenthedistributor/sellerlefttobeginhisnextcareer.However,thefirstplacetolookistothefranchisor.Manyfranchisesystemsassistfranchiseeswithlocatingasuccessorandhandlingtheresultanttransfer.

Anothersourceofinterestedpartiesmaybeaclientthatissubjecttodownsizingand/orconsolidationofalargecorporationwhoispreparedtosecuretheirfuturebypurchasingabusiness.Athirdpartyreferral,suchasabusinessbrokerorabroker’sreferralnetworkmayspeedtheprocessofqualifyingandmatchingpossibleprospects.

(ii) MARKETABILITY OF THE FRANCHISE BUSINESS

Buylowandsellhighisalwaysagreatidea,whetheritisastockorabusiness.Sellthestorewhensalesareclimbing,placingthebuyerinapositivestateofmindandpsychologicallypreparedtomakethepurchase.Thefollowingareimportanttothebuyer.

• Afullytrainedstaffisanattractiveasset• Allkeymanagementpositionsarefilled• Thelowerthedebtloadofabusinessthehighertheliquidityandcashflow• Severabilityofrealestatefromthebusiness• Completeanddetailedcorporatebooksandrecords• ApositiveEBITDA(EarningsBeforeInterest,Taxes,Depreciation,&Amortization)trendline• Afranchisethatisnotoverlydependentontheownerforitsoperationalsuccessand

profitability• Theageandconditionoftheequipmentandfacilities

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(iii) VALUATION OF THE BUSINESS

Therearevaluationissuesintheeventofdeathforfranchiseeswithasubstantialnetworth.Theestatetax–evenasmodifiedbytheEconomicGrowthandTaxReliefReconciliationActof2001–isaprincipalconsiderationindevelopingthesuccessionplan.TheInternalRevenueCoderequirestheestatetaxtobeimposeduponthefairmarketvalueoftheestateofthedeceasedatthetimeofdeath.Franchisescanpresentuniqueproblemsintheareaofvaluation.Amajorreasonforpreparingasuccessionplanistoavoidtheprospectofaforcedsalethatwoulddiminishthevalueofthefranchisebusiness.

(iv) VALUATION METHODS

TherearethreebasicmethodsofvaluationacceptedbythecourtsandtheIRS:bookvalueornetworth,capitalizationofearnings,andcomparablesalesofsimilarfranchisebusinesses.Themostpersuasive,whenavailable,iscomparablesales.Asarule,theinformationoncomparablesalesoffranchisebusinessesisinthepossessionofthefranchisor.Ideally,thefranchisesystemshouldprovideitsfranchiseeswithalltheinformationitcanaboutcomparablesaleswithoutdivulgingconfidentialinformation.

Abusinessisworthwhatanotherpartywillpayforit.Afranchiseemayhaveinvested24hoursaday,7daysaweekforyearsinabusiness,whichmaybeworthmillionstothem.Butthebuyerhasnoemotionalinvestmentandwillonlypurchaseifthebusinessoffersabetterreturnthananotherbusinessofferedinthemarketplace.

Tosetamarketableprice,onesourceofinformationistheresalelistofthefranchisor.Askhowmanytransactionswereresales.Whatpercentoftheiraskingpricedidtheysellfor?Whatmultipleofgrosssales,netsalesorprofitabilityiscommonlyusedtosetthesellingprice?Themarketsetsthepriceandifthepriceistoohigh,theprospecthastheoptionofinvestinginanewstart-uplocationifterritoryisavailable.Theadvantageofbuyinganexistingstoreisgenerationsofcashflowsandanestablishedclientbase,aslongastheaskingpricefortheseisreasonable.Finally,anytransferandfranchisefeesthatmayapplytothistransactionmustbediscussedwiththefranchisor.Thisshouldbeconsideredindetermininganytransferpriceofferedtoaprospectivesuccessor.

Thereareanumberofwaysofvaluingabusiness.Gotowww.smallbusinessnotes.comforacomprehensivelistofthedifferentwaysabusinesscanbevaluedindeterminingthepriceatwhichtosellthebusiness.

(v) SELLING TO AN EMPLOYEE

EmployeeStockOwnershipPlans,whichinvolvetransferringownershipofthecompanybothtofamilymembersandtoemployees,cannotbeusedontheirowntotransferownershipwhollytofamilymembers,buttheycanbeusedincombinationwithothermethodsoftransfer–suchasgiftingorrecapitalization–tokeepmajorityownershipinafamily.

Onescenarioofakeyemployeepurchasingthebusinessmightbe,“IfIdieoramdisabled,thecontractsthatIhavewithmytwotrustedexecutivesrequirethemtorunthecompanyforat

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leasttwoyears.Theyhaveanoptiontobuythecompanyatanytimefor$7millionor,iftheydecline,theywillbepaidasubstantialperformancebonusifthecompanyisultimatelysoldformorethan$8million.”

Onemethodforkeepinggoodemployeesinterestedingrowingthebusinessis‘keyman’insurance.Thisisapolicyinthenameoftheemployee,wherethecompanypaysthepremiumandtheemployeeaccruesthecashvalueofthepolicy.

Withsomanydecisionsandchoices,everysuccessionplanshouldbereviewedandapprovedbythesellingbusinessowners,theiraccountant,attorneyandfranchisor.Onemustplanaheadforasuccessfulandsmoothexitstrategy.

C. THe TrANSFer ProCeSS

Mostfranchisorshavedeterminedhowtheyaregoingtohandlethetransferprocess.ThisisreflectedintheFDDandmorespecificallydetailedinthefranchiseagreement.Atypicalprocesswouldbeasfollows:

1. Notification: Thefranchiseemustgivenoticetothefranchisorofhisintenttotransferthebusiness,whethertoanotherfranchiseoperatororfamilymember.Theperiodfornotification,ifnotregulatedbyStatelaw,isgenerally30to90daysbeforetheproposedtransfer.

Thefranchisormostlikelywillrequirethepaymentofatransferfeeatthetimetherequestfortransferisreceivedorlater,whendocumentsaresignedgivingthefranchisor’sapproval.Mostfranchiseagreementsrequirethefranchiseetonotifythefranchisorintheeventofthedeathordisabilityofthefranchisee.Therearegenerallyspecifiedtimeframesforaqualifiedsuccessortobenamedandmeetthefranchisor’sapprovalcriteria.

Itwouldbeprudentforeveryfranchiseetohaveaprospectivesuccessoridentifiedshouldtheybeneeded.However,veryfewfranchiseeshaveconsideredidentifyingaprospectinadvance.

2. Approval:Thefranchisorwillhavetherighttoapprovethetransfereethefranchiseedesignates,whetheritisanotherbusinessperson,arelative,oranotherfranchisee.Theprospectivefranchiseewillhavetomeetthefranchisor’scurrentrequirementsforanewprospectivefranchisee,includingfinancialqualifications,experience,businessacumenandcommitmenttooperatethefranchise.

Forthefranchisee’sfamilymembers,sometimestheapprovalrequirementsarelessstringent.Careshouldbetakentounderstandthenatureofthetransferorsliabilityafterthetransfer,asmanyfranchisorsdoNOTreleasetheoriginalfranchiseefromallorpartoftheirliabilityunderthefranchiseagreement,whenitisassignedtoasuccessor.

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3. Right of First Refusal:Manyfranchisorshavearightoffirstrefusaltopurchasethefranchisedbusinessatthepointofaproposedtransferifcertainfactorsexist.Thesemayincludeinstanceswhentheprospectivesuccessorisabusinesspersonfromoutsidethesystem,afamilymemberthatisdeemednotqualifiedtooperatethefranchisedbusiness,orothersimilarsituations.

Somefranchisorswillnegotiatethisprovisionoutofthefranchiseagreement,especiallyinanewfranchisesystem.However,asthefranchisorandtheirsystemgrows,afranchisorwillbeincreasinglyreluctanttoremoveordilutethisprovision.

4. Training: Ifthefranchisorapprovesthetransfer,therewillberequiredtrainingtofurtherqualifythetransfereetooperatethefranchisedbusiness.Thistrainingmayrequirethetransfereetoattainsomelevelofcompetencytosatisfythequalificationprocess.Theremaybetrainingfeestobepaidbythetransferee,alongwithtravelandlivingexpensesincurredduringthetrainingperiod.

5. Effective Dates for Transfer of the Franchise:Dependingonthetypeofbusiness,therewillbeapointintimewhenthetransferofficiallyoccurs.Ifthebusinesshastangibleassets,itwillgenerallybeonthedayanddatewhenthoseassetshavebeenofficiallyconveyedtothetransferee.Ifitisaservicebusiness,itisgenerallywhentheaccountshavebeenpresentedandtherevenuegeneratedafterthatdateaccruestothetransferee.

(i) LOCATING PROSPECTIVE BUYERS

Oneofthebenefitsofowningafranchisedbusinessistheavailablepoolofprospectivebuyers.Thepoolofcandidatesmayinclude:

• Existingfranchiseesinthesamesystem.• Ifallowed,franchiseesofotherconceptsinthesamevicinitywhoarelookingfor

expansionopportunities,butarelimitedwithintheirpresentconcept.• Forexample,aBaskin-Robbinsfranchiseewithnoaccesstoanother31Flavors

franchiseintheirareamayseekanotherfranchisebrand,suchasacoffeeshoporsandwichshop,inthesamearea.

• Franchiseprospectsthatareinterestedinbuyinga‘goingconcern’withimmediatecashflowversusastart-upsituation,whichcouldtake6to12monthstoopen.

Oneofthekeystosuccessinlocatingabuyerforafranchisedbusinessistounderstandtherolethefranchiseeandthefranchisorcanplayinthetransferprocess.However,almostalwaystheprospectivefranchiseemustmeetthequalificationsassetforthbythefranchisorandbeapprovedbythefranchisor.Franchisor’srole:Thefranchisorwillgenerallytakea‘handsoff’approachinthepreparationofthelegalsaledocuments,butexperienceindicatesthatmanyareeagertosupportafranchiseeinthetransferprocess.Thefranchisorwantstoensureaqualifiedoperatorendsupwiththebusinessandmanyfranchisorswillactivelymarkettheopportunitywithintheirorganizationandtonewfranchiseprospects.Franchisee’srole:Thebottomlineisthatafranchiseeisresponsibleformakingthedecisiontheywanttoaffectatransferandlocatinganappropriatetransferee.Therearenumerousavenuesandresourcesforreachingthatdecisionthatatransferisappropriateandforlocatingpotentialtransferees:

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• Franchisee’snetwork–Oneplacetolookiswithinthefranchisee’sownsphereofinfluence,suchasbusinesscontacts,vendors,otherfranchiseesinthearea,friendsandrelatives.Manytransfersresultfrominterestshowninafranchisedbusinessbysomeonewithpersonalinvolvementinthebusinessand/orthefranchisee.

• Franchisor’snetwork–Ifthefranchisoriswillingtoprovideaccessto,orstimulateinterestfrom,theirnetworkoffranchisees,prospectsandvendors,itisthefranchisee’sresponsibilitytoindependentlyinvestigateeachleadanddetermineifitrepresentsatrueprospect.Becausetheprospectreferralcamethroughthefranchisordoesn’tnecessarilymeantheywillmeetthefranchisor’scriteriaforapprovaltoacquirethefranchisedbusiness.

• BusinessBrokers–ThereisanactivebusinessbrokernetworkintheU.S.andabroadthatrepresentbuyersandsellersofbusinesses,bothfranchisedandindependent.Onemustbecertainthatthebrokerworkswithfranchisedbusinessesandunderstandsthatthebuyermustultimatelybequalifiedandapprovedbythefranchisorpriortothebuyeracquiringthefranchise.Manyprospectsinitiallyseekinganon-franchisedbusinessthroughabusinessbrokerbecomeinterestedinafranchisedbusinessduringtheprocess.

• Thebasisforusingabusinessbroker,whethertorepresentthesaleofyourbusinessortoprovideprospectivebuyersforyourbusiness,isthecontractyousignwiththem.Itwillidentifytheservicesthebrokerwillprovideandfeesthatwillbeincurredshouldasaleresult.Thesefeescanvarysubstantiallybetweenbrokers.Beforeemployingabroker,thesellershouldrequestaclientlistfromthebroker,withcontactinformation,togetrecommendationsregardingthebroker’spastservicestohisclients.

(ii) APPROVAL/DISAPPROVAL PROCESS

Oncethedecisionhasbeenmadebyafranchiseetosellafranchisebusiness,thetransfereehasbeenidentifiedandthepriceandtermshavebeenagreedupon,thefranchisorwillhavetherighttograntordenytherequestforapprovalofthetransfereewithinaspecifiedtimeframe.Thefranchisormayalsorequirefranchiseand/orbackgroundcheckdocumentsbecompletedbeforeitwillconsideranapplicationforapproval.

• Approval–Thefranchisor’sapprovalofthebuyershouldbeinwritingtoensurenomisunderstandings.Theapprovalwillgenerallystatewhetheritiscontingentonanyotherfactors,suchasobtainingfinancing,successfullycompletingtrainingandapprovalofdocumentssuchasanAssetSaleAgreementorPurchaseAgreement.

• Disapproval–Oneofthemostchallengingaspectsofthefranchiserelationshipcanbethedisapprovalofarequesttotransferafranchisedbusiness,whethertoaanotherfranchisee,athirdpartybuyerortoafamilymember.Therearesometimesrightsprovidedinthefranchiseagreementtoappealthedisapprovalofatransferrequest.However,atbest,thisresultsinadelayinthetransfertimetable.

(iii) THE IMPORTANCE OF ESTABLISHING A TRANSFER POLICY

Thereareseveralreasonswhyafranchiseemaychoosetoexitthefranchisesystemandtransferhisbusinessandfranchisetoanotherparty.Afranchiseemaychoosetotransferbecauseheisretiring,notexperiencingthelevelofsuccessorsatisfactionhewasexpecting,orbecausethebusinesswasverysuccessfulandnowthefranchiseewantstosellatafavorablepriceand

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pursueotheropportunities.Regardlessofthereasonfortransfer,everyfranchisorshouldhaveestablishedatransferpolicy/processsothatallfranchiseescanunderstanditandtransferscanmoveforwardassmoothlyaspossible.

Thetransferpolicyshouldtakeintoconsiderationtheinterestsofallthepartiesinvolved.Thethreepartiesalwaysinvolvedintransfersare:thefranchisor,thefranchisee(transferor)andthetransferee(prospectivenewfranchisee).

Thefranchisor’sinterestintransfersiswantingtomakesurethetransfereemeetsitscurrentcriteriaforqualifyingasafranchisee,thatthetransfereewillbeagoodfitwithinthesystemandthatthebusinessisbeingsold/purchasedforareasonablepricetoaffordthetransfereeagoodchanceforfinancialsuccess.Thefranchisee’sinterestintransfersboilsdowntowantingtoexitthefranchisesysteminatimelymanner,whilegettingthehighestpricefortheirfranchisedbusiness.

Thetransferee’sinterestisdifferent.Thetransfereeneedstobesurethesystemtheyareenteringisonetheywanttobeactiveinforthelifeofthefranchiseagreement.Thetransfereeneedstomakesuretheyarepayingafairpriceforthebusinessandneedtobeawareofthechallengesthatmayoccurfromassumingownershipofanexistingbusiness,regardlessofwhetherthebusinessissuccessfulornot.

(iv) A PERFECT WORLD TRANSFER SCENARIO

Inaperfectworld,alltransferswouldbecookie-cuttercasesandtheprocessthefranchisorhasestablishedwouldbefollowedquicklyandsmoothlyeverytime.Unfortunatelythisisnotaperfectworld.Butthatdoesn’tmeanfranchisorsshouldn’testablishtransferpoliciesasifitwere.Hereisasample“perfectworld”transferscenario:

1). ThefranchiseecommunicateshisdesiretosellhisbusinessandexitthesystemtohisFieldRepresentativeorhiscontactatthefranchiseheadquarters.

2). Oncetheinitialcommunicationhasbeenmade,thefranchisorrepresentativeandthefranchiseediscusswhetherthefranchisormayhaveaqualifiedprospectfortheunit.However,inmostcases,thefranchiseemustlookforhisownbuyer.

3). Onceacandidateislocated,thefranchisorwillinterviewandqualifythecandidateinasimilarfashionasanewprospect.Oneofthemostfrequentcomplaintsfromfranchiseesregardingtransfersisthatthefranchisorismuchmorestringentinestablishingitsqualificationsforatransfereethantheyseemtobeforanewfranchiseecomingintothesystem.Thisseemsunfairtothefranchiseebecausesuchpracticesmakeexitingthesystemforthemmoredifficult.Ifthesameapprovalcriteriaareusedfortransfersasfornewsales,therewouldbelessroomfordispute.

4). Whileaqualifiedtransfereeisbeingsought,apriceforthebusinessshouldbeestablished.Regardlessofwhenthesalepriceisarrivedatbythetransferor,theyshouldbeawarethatundermostfranchiseagreements,thefranchisorhastherighttoknowtheaskingpriceandothertermsofthetransferofthebusiness,forpossibleexerciseofitsrightoffirstrefusalorcompliancewiththefranchiseagreement,andtoapprovetheterms.

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Itisthefranchisor’sresponsibilitytoprotectthetransfereeandthesystem.Ifthetransferee’sdebt/equityratioistoohighbasedonthepurchasepriceandtheamountofdebtowedtothetransferororthelender,thetransfereemaynotsuccessfullygrowthebusinessandmayjeopardizeitssuccess.

5). Onceaqualifiedcandidateisfoundandapprovedandafairpriceisagreeduponbyallparties,aclosingandtransitiontimelineshouldbeset.Thistimelineshouldoutlinesuchthingsas:trainingforthetransfereewiththefranchisor,on-sitetrainingforthetransfereeeitherbythetransferororthefranchisor,aclosingdate,signingoflegaldocumentsinvolvedandpaymentofthepurchasepriceandtransferfee.

6). Whenalloftheitemsonthetransitiontimelinehavebeencompleted,thetransfereewilltakeoverthebusiness.Fromthispointforward,theinvolvementofthetransferor(originalfranchisee)willvaryfromsystemtosystem.Insomefranchisesystems,itislikelytheoriginalfranchiseewillhavenofurthercontactwiththetransfereeorthefranchisor,afterthetransferiscomplete.Itisusuallyeasierforthetransfereeandfranchisortohaveabetterworkingrelationshipifthetransferorisn’tcontinually“inthemiddle”ofthenewrelationshipofferingtheiropinions.Insomecases,somefranchisorsmayencouragethetransferortostayinvolvedforafewmonthsafterthetransferoccurs,becausetheoriginalfranchisee’scontinuedinvolvementmayhelpthetransfereemorequicklygetontheirfeet.

(v) WHAT NORMALLY HAPPENS IN THE TRANSFER SCENARIO

Mostfranchisorswilltellyouthatmosttransfersdonotgoexactlyliketheirtransferpolicyprovides.Therearecircumstancesthataffecteverytransfer,makingitdifficulttofollowtherulesattimes.

Sometimesthefranchisoristhelasttoknowwhenatransferisabouttooccurorhasalreadytakenplace.Thefranchisorgetscontactedafterthefranchiseehasfoundsomeonelocallywhoisinterestedinpurchasingthebusinessandthentheyreporttheclosingisalreadyscheduled.

Asafranchisorinthisscenario,firststartsortingthroughthepiecesofthepuzzle,becauseafranchisorcannotstickitsheadinthesandandrefusetoworkwiththefranchiseetocorrectthesituation.Onceyoudeterminehowfarintothetransferprocessthefranchiseealreadyis,afranchisorneedstodoitsbesttoproceedfromthere.

(vi) LOCATING BUYERS

Locatingbuyersfortransferunitsistheprimarytask.Franchiseesoftenlookfirsttointerestedpartieswithintheirregion.

Perhapsalocalmulti-unitoperatorisinterestedingrowthbyacquisitionormaybeanacquaintancehasalwaysbeeninterestedingettinginvolvedwiththesystemandthisisaconvenientlocationtoavoidrelocating.Howeverpotentialbuyersarelocatedforthepurchaseofthistransferunit,afranchiseeshouldfollowthesystem’stransferpolicytoavoidconfusionanddelays.

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(vii) UNQUALIFIED CANDIDATES IN TRANSFERS

Oneofthemostchallengingcircumstancesintransfersituationsiswhenthefranchiseepresentsapotentialbuyerandthebuyerdoesnotmeetfranchisor’squalificationstobeafranchisee.Thissituationcanbecomemorecomplicatedifthefranchiseeandprospectivetransfereehavealreadyagreeduponaprice,scheduledtheclosingandaremovingforwardwiththetransferbeforecontactingthefranchisor.

Itisworthwhiletomentionthatwhilemostfranchisorswillnotunreasonablywithholditsapprovalofatransfer,thereisstillaqualificationprocesswhichmustbefollowed.Thefranchisee(whoprobablywentthroughasimilarfranchiseecriteriaandqualificationprocesswhentheyenteredthesystem)shouldbeawaretheyneedtohelpthetransfereegetapprovediftheywanttoexitthesysteminatimely,cost-effectivemanner.

Whenasituationariseswherethefranchiseehasbroughtatrulyunqualifiedcandidatetothefranchisorforapproval,thefranchisorshouldbeconciseandstraightforwardwiththefranchiseeintheirassessment.Clearlyoutlinewhythecandidatedoesnotqualify,butdonotleavetheconversationopenforfurtherdiscussion.Ifthefranchisorcanclearlyidentifytothefranchiseewhyaparticularcandidatedidnotqualify,thenthefranchiseeshouldbewillingtogooutandsearchforacandidatewhodoesmeetthecriteria.

Ifthefranchiseebringsmultiplecandidatestothefranchisorforreview,butisrepeatedlytoldtheprospectsdonotqualify,thefranchisorshouldbepreparedforstrongresistancefromafranchisee.Ifthefranchisoriscontinuallyrejectingthefranchisee’scandidates,perhapsthefranchisorshouldstepbackandconsiderwhethertheyarefairlyevaluatingthecandidatesorifthereissomeotherreasonwhytheprospectsarenotmeetingthefranchisor’scurrentstandards.

(viii) TRANSFER FEES

Somefranchisorshavefeesassociatedwiththerequesttohaveabuyerapprovedwhileothershavefeesassociatedwiththesubsequenttransferofafranchisedbusiness.Thefranchisordoesnotwantfranchiseestocapriciouslysubmitprospectsforreviewwithoutremunerationforthetimeandresourcesitwilltaketoadequatelyreviewandapproveeachprospect.Sometimes,thefeesareconnectedtovariouselementsoftheprocess,withseparatefeesforreviewingtherequest,qualifyingprospects,approvingtherequestandfinallydocumentingtherequest.

Insomecircumstances,thefranchisormaysetthefeeasapercentageofthesaleprice,whichcanresultinsignificantfees.Generally,thefeeschargedbyfranchisorsforapprovingthesaleofabusinessandthetransferofanexistingfranchiseagreementarespelledoutinthefranchiseagreement.Thefeescanbesignificant,whichiswhyitisimportanttoaddressthemclearlyinthefranchiseagreementandforafranchiseetothoroughlyreviewandunderstandthetransferprocess.

Mostfranchisorscontendthetransferfee,payableatthetimeofclosingbyeitherthetransferor(franchisee)ortransferee,isneededtocoverthefranchisor’sexpensesofbeinginvolvedinthetransferprocess,whichoftencanbelengthyandtime-consumingforthefranchisortoapprovethebuyer.Thetransferormayfeeltheyshouldn’thavetopaythetransferfeebecausetheypaidthefranchisefeewhentheyjoinedthesystem.

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Itisimportanttoboththefranchisorandfranchiseethatarequirementtopaytheamountofsuchfeebeclearlyspecifiedinthefranchiseagreement,includingpaymentofthetransferfeeasaconditionoftheclosingandtransferofthefranchise.

d. TrANSFer doCUMeNTATIoN

Thereareprimarilytwowaystotransferafranchisedbusiness,withaccompanyingdocumentation.Thefirstmethodisforthefranchisorandtransfereetosignanewfranchiseagreementunderwhichthetransfereewillbeawardedafullnewtermof5,10,15or20years.Thesecondmethodisforthetransferor,transfereeandfranchisortoexecutean“AssignmentofFranchiseAgreement”.

Theassignmentmethodisoftenusedwhentherearemultipleyearsleftontheoriginalfranchiseagreementorwhenthetransferornegotiatedfavorabletermsinitiallyforhimself,whichwouldcontinuetobeabenefittothetransferee.Afranchisormaysometimespreferthismethodifitdoesnothaveacurrentfranchisedisclosuredocumentorisnotregisteredtosellfranchisesinthestatewherethetransferistakingplace.

Ifthesellingfranchiseehasanoldoroutdatedfranchiseagreement,thefranchisormaywanttohavethetransfereeexecuteacurrentformofagreementtobeconsistentwithnewfranchisesales.Itisimportanttothefranchisortohavethetransferorsignageneralreleasestatingthatnoclaimsordisputesexistfortheperiodthefranchiseagreementwasineffect.Thisbringsclosuretothebusinessrelationshipforbothparties.Onceabuyerisidentifiedandthebusinessterms(e.g.,personalandrealpropertytobetransferred,purchaseprice,financing)arefullynegotiated,thelegalprocess–asbrieflydescribedbelow–canbegin.

(i) DOCUMENTATION

Abuy-sellagreementwillneedtobedraftedbylegalcounsel,whetherthetransferisoftheassetsofthebusiness(includingthefranchiserights)orthestockorpartnershipinterestinthefranchisee.Ifassetswillbesold,itmaybecalledan“AssetPurchaseAgreement.”Ifstockwillbesold,itmightbedescribedasa“StockPurchaseAgreement.”Ineithercase,tomakethedraftingprocessmoreefficient,a“letterofintent”ora“termsheet”initiallywillbepreparedandexecuted,outliningthemainprovisionsoftheparties’agreement.Ineithercase,thedocumentsmustbeincompliancewiththefranchiseagreement.Thetransferorneedstoconfirmwhatisownedbythefranchiseeandwhatisownedbythefranchisorandonlyincludeassetsthataretrulytransferable.

Thebuy-sellagreementwilldescribethepartiestothesale;thespecificassets,stock,orpartnershipintereststobesold;thetimingofthesale;thepurchasepriceandhowandwhenitwillbepaid;anyfinancing;indicationsofwhoisresponsiblefordebtsandliabilities;andothersuchtermsparticulartothesale.Thisisanegotiateddocumentandlegalcounselisusuallyinvolvedinitspreparation.

Franchisetransfersalsotakeplacewhenthereisatransferofassetsfromtheestateofadeceasedorincapacitatedfranchisee.Transfersmayalsooccurwhenanindividualfranchiseepersonallytransferstoanotherlegalentity(e.g.,corporationorlimitedliabilitycompany)whichthefranchiseehasformedforconvenienceofownershiportaxpurposes.Typicallysimplerdocumentationisrequiredininstanceswhereathirdpartyisnotinvolved.

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(ii) CONSENT TO TRANSFER

Thefranchiseagreementwilladdresstransfersbyboththefranchisorandthefranchisee.Forfranchisortransfers,theagreementtypicallywillstatethatthefranchisorisfreetotransferthefranchiseagreementandthatitneednotobtainanyconsentorapprovaltodosofromfranchisees.However,franchiseesarepermittedtotransferonlyiftheyobtainpriorwrittenapprovalfromthefranchisor.Typically,thefranchiseagreementwillstatethatapproval“willnotbeunreasonablywithheld”.Itwouldbeconsideredreasonableforthefranchisortowithholdconsentundercircumstances,suchas:• thesellingfranchiseehasnotpaidalloutstandingmonetaryobligationstothefranchisorand,

insomecases,outsidesuppliers;• thesellingfranchiseeisindefaultunderthefranchiseagreement;• thesellingfranchiseehasnotsignedageneralreleaseofclaims;• thesellingfranchiseehasnotpaidatransferfeetocoverthefranchisor’scostsofthetransfer;• thesellingfranchiseerefusestoacknowledgeitspost-terminationobligationsregarding

confidentialityandnon-competitionandtoremainliableforallpre-transferobligations;• thetermsofthebuy-sellagreementwouldcreateanunduefinancialstrainonthefranchised

businessandplacethebusinessinjeopardy;• thebuyerdoesnotmeetthefranchisor’sfinancial,educational,managerialorother

qualifications;• thebuyerfailstocompletethefranchisor’sinitialtrainingprogram;• ifrequiredbythefranchiseagreement,thebuyerrefusestoupgrade/renovatethepremises

tomeetstandards;• ifrequiredbythefranchiseagreement,thebuyerrefusestosignthecurrentfranchise

agreementortohaveitsprincipal’sguaranteeperformancepersonally.

(iii) APPLICABLE STATE LAWS

Therearesomestatelawsthatapplytotheprocessofobtainingapprovalfromafranchisortotransfer.Theselawsmayrestrictfranchisorsfromwithholdingapprovalofafranchisee’stransferrequest,exceptfor“goodcause.”Thedefinitionof“goodcause”variesfromstatetostate,butgenerallyrequiresfranchisorstoaccepttransfereesthatmeet“reasonable”qualifications.Permissiblegroundsfordisapprovalofatransferundersuchastatelawmayincludesituationswherethetransferee:(1)isacompetitortothefranchisor;(2)refusestoagreetothetermsofthefranchiseagreement;(3)failstocureadefaultbythecurrentfranchiseeundertheexistingfranchiseagreement;(4)wouldhaveanoverly-largeterritoryasaresultofthetransfer;or(5)wouldpayapurchasepricesohighthefranchisorreasonablybelievesitwouldimpairthetransferee’sabilitytogeneratesufficientcashflowtooperatethefranchisedbusinesssuccessfully.Afewstatelawsalsorequireafranchiseetoprovidethefranchisorwithwrittennotice,aswellasinformationconcerningtheproposedtransferee,beforemakingatransfer.

Afranchisors’refusaltoconsenttoatransfercanbechallengedbyafranchiseebaseduponcommonlaw,asdecidedincourtcasesbyjudgesinthejurisdictionprovidedforinthefranchiseagreement.Theprovisionmosttypicallyreferredtoisknownasthe“covenantofgoodfaithandfairdealing.”

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Applicationofacovenantofgoodfaithandfairdealingrequiresacourttodeterminewhetherthefranchisor’swithholdingofconsenttotransferunderthecircumstancespresentedwouldhavebeenreasonablyexpectedbythepartiesatthetimetheyenteredintothefranchiseagreement,regardlessofwhethertheissueisdirectlyaddressedinthefranchiseagreement.Thisfollowstheassumptionthatafranchisormaynotperformactsthatnegativelyaffecttheirfranchisee’sinterest.However,mostcourtshavenotimpliedacovenantofgoodfaithandfairdealingonissuesnotspecificallyreferredtointhefranchiseagreement.

(iv) DISCLOSURE

Whilefranchisesaleslawsrequirefranchisorstoprovidefranchisedisclosuredocuments(FDDs)toprospectivebuyers,inthecaseoftransfersthisobligationcontinuestobetheresponsibilityofthefranchisorandnotthesellingfranchisee.Franchisorsareoftenlegallyobligatedtoprovidesuchdisclosuredocumentstothebuyer,especiallytobuyerswhosignanewfranchiseagreementanddonotassumebyassignmenttheseller’sexistingfranchiseagreement.Tobeabletoprovidesuchdisclosure,thefranchisorneedstohaveacurrentFDDineffect,andalsoinsomestatesmustbecurrentlyregisteredtoofferandsellitsfranchises.

(v) TRANSFER PROCEDURES

Manyfranchisorsdistributetosellingfranchisees“transferpackages,”whichcontaininstructionsontheprocedurestofollowinsellingtheirfranchisebusiness.Thesepackagesprovidestep-by-stepinstructionsandmayincludeformsandstandarddocumentstobeexecuted,suchasanumbrelladocumentcalleda“ConsenttoTransferandReleaseAgreement”.Thisaddressesallofthepresentandfutureobligationsofthepartiesinconnectionwiththetransferandistobesignedbythefranchisor,thetransferor,andthebuyingfranchisees.

Eventhemostdetailedtransferpackages,however,willnotcovereverytypeoftransfer.Transferscanincludeacompletesale,asaleofapartialinterestinthefranchise,atransferondeath,atransfertotheirowncorporationorLLCforconvenience,apublicoffering,orotherwise.Eachwillpresentuniquefeaturestobeaddressedintheprocessanddocumentation.

Thedescriptionsaboveprovideageneralsenseofwhatwillberequiredformanytransfers.Thereisno“one-size-fits-all,”andeachtransactionisdifferent,sothat–fromboththebusinessandlegalperspectives–carefulplanningandacustomizedapproachwilloftenbenecessary.Forlegalissues,theadviceofanattorneywhohasexperiencewithfranchisetransferswillbevaluable.

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e. TrAINING ANd oPerATIoNAL SUPPorT For TrANSFereeS

(i) DIFFERENCES COMPARED TO A NEW FRANCHISEE

Insomerespects,thefranchisor’sjobissignificantlyeasierwithatransferee.Muchofthestart-upsupportthatwouldbeprovidedtoanewfranchiseemaybeunnecessary,asthetransfereewillbetakingoverafullystaffedandoperationalbusiness.Insite-specificbusinesses,forexample,thefranchisorisrelievedofprovidingtrainingandsupportintheareasofsiteselection,leasenegotiation,architecturalplanning,interiordesign,andconstruction.Typically,transfereesareenteringanestablishedbusinessoperation,whichwilloftenhaveexistingmanagementandstaffinplace,thehiringprocesswillhavebeencompletedandtheemployeestrained.

Thefranchisordoesfacesomeuniqueopportunitiesandchallengeswhenprovidingtrainingandoperationalsupporttotransfereeswhoarebecomingfranchisees.

Ifthetransferredfranchisewaswellrunpriortothetransfer,thegoalofasuccessfultransfermaybetoprovideaseamlesstransitionbetweenfranchiseeandtransferee,maintainingthehighstandardssetbytheoriginalfranchisee.Thismayhaveimplicationsrelativetothenewfranchiseeadjustingtoanestablishedcultureamongtheemployeesattheunitlevel.Theremaybeaneedtohelptheemployeesadapttochangesinownershipandadifferentcultureandenvironment.

Conversely,whenthepreviousfranchiseewasaless-than-stellarorunsuccessfuloperator,thechallengebecomesoneofinstitutingincrementalimprovementtotheexistingoperation.Insomecases,improvementcanbeattainedgraduallyuntilanoperationisoperatingatorabovesystemstandards.Inothercases,moreradicalchangesmaybenecessary.

(ii) COMPLIANCE REVIEW AT TRANSFER

Atthesametime,manyfranchisorslookatatransitionwithanewfranchiseeasanopportunitytoimproveaunittomeetcurrentsystemstandards.AchangeoffranchiseeownershipmayinvokeprovisionsintheFranchiseAgreementforremodelingandupgradesindécor,equipment,signage,newPOSsystems,orinstitutingchangesinoperatingprocedurestothecurrentsystemstandards.

Inthiscase,thefranchisorandthetransfereecanlookatatransferasanopportunitytoimproveboththeirlocationandthesystemasawhole.(iii) INITIAL TRAINING PROGRAMS

Whenanestablishedunitisupandoperatingwithexperiencedpersonnel,theremaybeatemptationonthepartofsomefranchisorsandfranchiseestoskiportominimizethetransferee’sneedforinitialtraining.Andwhileshorteningoreliminatingtrainingmightbepossible,thereareanumberofreasonswhythetransfereeshouldberequiredtoandwanttocompletethesametrainingprogramasanewstart-upfranchisee.

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Thefirstreasonisimprovedqualitycontroltomeetcurrentoperatingstandards.Thetransferprocessallowsthefranchisortheopportunitytoidentifyandbreakbadhabitsandtocorrectnon-standardactivitiesthatunit-levelpersonnelmayhavedevelopedunderthepreviousfranchisee.Thistrainingwillhelpstrengthenthesystemforboththefranchisorandfranchisee.Thereisalsothepossibilitythatthenewfranchiseewillnotpasstraining–anditwillbebettertodeterminethisinadvancebeforethenewfranchiseeisintheunitoperatingit.

Asecondreasonrelatestolegalissues.Oneadvantagetothefranchiserelationshipisthatthefranchisorcanreducetheriskofliabilityfortheactsoftheirfranchisees.Ifafranchisorfailstoprovideadequatetrainingonanissuerelativetosafetyorotheroperatingpolicies,afranchisee’sactionsmaycreatethistypeofliabilityforafranchisor.

Forexample,afranchiseethatisnottrainedintheareaofsexualharassmentmightunwittinglycreateliabilitybothforitselfandforthefranchisorbysteppingoverthelinewithanemployeetocreateaharassmentcharge.Ifproperlytrainedandtestedbythefranchisorconcerningsexualharassmentissues,thatfranchiseeinthesamesituationmightavoidcreatingaproblemwithsignificantliabilitypotential.

Onefinalreasonforfullandcompletetrainingofatransferfranchiseeisthatthisprocessprovidesanopportunityforthefranchisoranditsstafftodeveloparelationshipwiththenewfranchisee.Asidefromtheabilitytomakeadeterminationastothefranchisee’scompetenceinoperations,thetrainingexperienceisa“once-in-a-relationship”opportunityforbondingwiththefranchisorandisanopportunityforthefranchisortoexplain“whywedoitlikethat.”

(iv) ON-SITE VISITATIONS

Inmanyfranchisesystems,thefrequencyofon-sitevisitationsbyfranchiseserviceconsultantsinthefielddecreasesovertime,asthefranchiseegrowsmoreandmorecompetentandexperiencedintheoperationofthefranchise.Whenanewfranchisetransfereetakesoveranestablishedoperation,thefranchisormaycontinuewiththepreviouslyestablishedfieldvisitfrequencyappropriateforanexperiencedfranchisee,insteadofthevisitfrequencyofanewfranchisee.

Itismoreappropriateinthefirstweeksfollowingatransfertovisitatransfereeatleastasfrequentlyasthefranchisorwouldvisitanewstart-upoperator.Insomecases,thevisitsshouldbemorefrequent.Whilethetransfereemayhaveanumberofadvantagesoverthestart-upoperatorfromthestandpointofexistingtrainedstaffandanestablishedcustomerbase,inthefirstweeksofoperationtheinexperiencedtransfereewithlittleornotrainingcanpermanentlydamageyearsofgoodwillbuiltupbythepreviousfranchiseethroughtheirerrorsandoperatingmistakes.Theinitialvisitsbyfranchisorfieldrepresentativesoftenfocusonpersonnelandmoraleissues,aswellasonoperationalissues.

(v) HOW TO GET NEW TRANSFEREES UP-TO-SPEED OPERATIONALLY

Manyfranchisesystemsrequirethetransferee’sinitialtrainingtobecompletedbeforethetransferisfinalizedasitisthecriticalelementinbringingtransfereesup-to-speedintheirnewbusiness.Asindicatedabove,itisstronglyadvisedthattransfereesattendthefulltrainingprogramofferedtonewstart-upoperators.

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Ifthetransfereeisbringinginanewmanagertooverseeday-to-dayoperations,thatindividualshouldalsocompletethefranchisor’sentirepre-openinginitialtrainingprogram.Ifthepriorfranchisee’smanagementstaffisgoingtoremaininthebusinessandreporttothenewfranchisee,itisoftenusefultohavethesekeymanagersalsoattendrefreshertrainingconductedbythefranchisor.

Thisisparticularlyimportantiftheoperationsoftheoriginalownerwerenotmaintainedaccordingtothefranchisor’ssystemstandards.Suchtrainingwillnotonlyensurethemanagersarefamiliarwithcurrentproceduresinusethroughoutthesystem,butitwillalsohelptocreatenewenthusiasmfortheirroleinthebusiness.Anaddedbenefitofthenewfranchiseeandtheformerfranchisee’smanagersattendingtrainingtogetheristhattheywillbegindevelopingtheirownpersonalnetworkingrelationshipinapositiveenvironmentawayfromthebusinesslocation.

Anotherstrategytohelpimprovethetransferee’soperationalperformanceandresults,whenappropriate,istoconducton-sitetrainingattheirlocationimmediatelyfollowingtheirsuccessfulcompletionofheadquarterstraining.Althoughmostfranchisesystemsprovideon-sitetrainingtonewstart-upoperators,manydonotprovidesimilar(orasextensive)trainingtotransfereesattheirlocation.Athoroughon-sitetrainingcomponentfortransfereeswillenablethefranchisorto:• Observetheperformanceofthetransfereeintheirnewbusinessandidentifyanyissueswhich

needfurtherattention;• Assistthetransfereeandtheirstafftoimplementcurrentoperationsstandards,introducedat

thetimeofthetransfer;• Identifyandcorrectanyoperationaldeficienciesthatmightexistatthelocation;• Providetrainingasneededforunitco-workersandemployees;and• Followingon-sitetrainingatthetransferee’slocation,thefranchisorcanidentifyanyremaining

operationsissuesthatneedtobeaddressed,anddevelopanactionplanwiththetransfereeforresolvingthem.

(vi) MENTOR PROGRAMS

Manyfranchisesystemshaveestablishedmentorprogramstofacilitatethesuccessfultransitionofanexistingfranchisedlocationtoanewoperator.Additionally,amentorshipprogramisavailablethroughtheFranchiseRelationsCommitteeoftheInternationalFranchiseAssociation.Inatypicalmentorprogram,atransfereewillbeassignedtoanexistingexperiencedoperatorpriortotheirassumingday-to-daymanagementresponsibilitiesoftheirnewbusiness.Theextentofthementoringprocesscanrangefromanexperiencedoperatorsimplybeingavailableasneededtoanswerquestionsonthetelephone,toamoredirectroleofmeetingwiththetransfereeorhelpingthemwithoperationsissuesattheirfranchisedlocation.

Keyelementsofasuccessfulmentoringprogramincludethefollowing:• Onlyfranchiseesthatareoperatingatorabovethefranchisor’sstandardsshouldbepermitted

tofulfillamentoringrole;• Ideally,mentorswillbelocatedwithinthesamecityorregionasthetransferee.Thislocal

connectionwillenablethementortobestunderstandtheneedsofthetransferee,andbeavailableifneededtomeetwiththefranchisee;and

• Althoughthefranchisorshouldhavesomeinputintothementoringprogram(e.g.,whichfranchiseesareapprovedtobementors),franchiseesshouldbeverymuchinvolvedindevelopingandmanagingthementoringprocess.Amentoringprogrammusthavethefullsupportoffranchiseestosucceed.

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Successfulmentorprogramswillnotonlybenefitthetransferee,butwillalsobenefittheexistingfranchiseesthatparticipateasmentors.Throughthementoringprocess,existingfranchiseeswilldeveloprelationshipswithnewoperatorsinthesystemmorequickly.Theybegintodevelopdialoguewithintheirregiononissuessuchasbestpractices,cooperativemarketingandothertopicsrelatedtothegrowthoftheirrespectivebusinesses.

F. CoNCLUSIoN

Whiletransfersarenotalwaysgoingtobecookie-cuttercasesorfollowthetransferpolicyperfectly,itiscriticaltothefranchisesystemforthefranchisortohaveadetailedtransferpolicyineffectsothatallpartiesareonanevenplayingfieldandfewerdisputeswillresult.

Formanysuccessfulbusinesspersons,fromdayonetheirbusinessis“ForSale”.Thisdoesn’tmeanthatmillionairebusinessownershangupa“ForSale’signnexttothe“GrandOpening”sign.Itdoesmeanthatmanysuccessfulbusinessownershavetwobusinessplansintheirheads,ifnotonpaper.

Thefirstbusinessplancovershowtobuildasuccessfulbusiness.Thesecondplanshowsthebusinessownerhowtomaximizehisreturnoninvestmentwhenhewantstosellhissuccessfulbusiness.Theirsecondtypeofbusinessplanisconsideredanexitstrategy.n

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INTerNATIoNAL FrANCHISe ASSoCIATIoN

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Franchise Succession Planning and Transfers · · 2014-12-23Franchise Succession Planning and Transfers A Best Practices Handbook ... THE SALE AND TRANSFER OF THE FRANCHISE ...

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