Lexington, KY - Like other segments of our population, the "graying" of America affects business franchisees, and there are a multiple strategies that franchisees approaching retirement might want to consider for ownership transition purposes. While many franchise owners may choose the simple (or not so simple) option of transferring to family members or one's management team, this article concentrates on the other choices that may be considered, along with some related legal considerations.
Initial hurdles
Among others, the following threshold concerns must be considered: First, and perhaps foremost, generally your franchisor's consent must be obtained prior to transfer. An obvious point, right? However, many franchisees either forget or do not realize that the franchisor's consent can be difficult to obtain. While franchisors want successful locations to continue, generally they examine proposed transferees very closely. Thus, start early on the transfer process once a prospective buyer is identified.
Of course, franchise agreements are generally limited in duration, including new agreements signed upon transfer. Thus, a buyer must be comfortable with that fact and the risk that a franchisor elects to terminate the agreement at renewal time. However, again, your franchisor is interested in the continued existence of its brand at your successful location. As a result, you and your proposed buyer may be able to obtain franchisor commitments that reduce such risks.
Real-estate-related
considerations
Do you own or lease the real estate associated with your franchise unit(s) - or a combination? This brief article doesn't permit discussion of real estate concerns, but you must include your landlord in the mix and, if you own your property, what shopping center or other deed or land-use restrictions might affect your exit plans.
Outside-party strategy overview
"I'll simply sell to another franchisee."
It would be nice if this were a ready solution in all cases. The strategy will depend on the number of units owned. If you are a single or two- to three-unit franchisee, your universe of buyers among same-brand franchisees starts and may end with ones in close proximity. Also, other small franchisees often have limited financial and other resources. This option is not as simple as it might seem.
If time permits and you're ambitious enough, pursue a "rollup" strategy, with an eye toward selling to another multi-unit (MU) franchisee or other buyer. Briefly, for franchises, "rolling up" could involve (a) the purchase of several small franchisees' units to build a MU operation or (b) the purchase of one or more existing MU operations, to build a larger MU operation, which would be particularly attractive to "private equity groups," or PEGs.
As hinted above, a further reason rollups make sense, and this reason is critical for those who have the time and ambition to seek a "financial buyer": Professionally managed, niche-focused private investment firms known as private equity groups are actively pursuing MU franchise businesses. They see such franchises as ripe opportunities for "platform" investments, which is PE-talk for further rollup by the PEG, leading to larger sales and returns on investment.
A similar strategy would include a series of mergers between small franchisees, to build to MU status (or larger MU status), followed by either a sale or further rolling up, as discussed above. Serial mergers are "doable," but may be difficult to conduct initially and, if pursued, may be tough from a follow-through execution standpoint in several regards. Nevertheless, with sufficient time, resources, drive and patience, they can be a realistic possibility.
Other options
Are ESOPs an option? Employee stock ownership plans, or ESOPs, are tax code-qualified plans to which businesses can be sold. With an ESOP, your employees become the owners of your business, usually over time as the ESOP's acquisition loan is repaid. ESOPs are probably suited only for MU operations, and probably only larger ones at that. If a fit, an ESOP offers tremendous tax advantages to the exiting owner(s), including opportunities to (a) defer the capital gain on the sale and (b) if the sale proceeds are converted into "qualified replacement property" and held until death, avoid federal estate taxes completely. It's a powerful planning tool, if it fits.
If none of the above options are feasible, a possible, interim solution would be to engage a management company, if you cannot continue managing the business and none of your managers is currently able to buy. This option may be limited to larger MU franchisees, but it should be explored by smaller franchisees, too. There may be potential buyers who would welcome an opportunity to "kick the tires" before making an offer.
Liquidation
Of course, you may have timed your franchise purchase so that your rights expire at your retirement age. You could simply conduct a going-out-of-business sale and liquidate the business. However, liquidations generally generate the smallest return of value, which you've work hard to build. It's generally the least attractive option, so avoid it if you can.
Start early
Like all business owners, you should have an "exit plan." Moreover, if you're nearing retirement, you should start planning earlier rather than later. You will need outside professional advice, including a valuation specialist. Unique aspects of franchise businesses only amplify the need to devote time to ownership transition planning. That said, with some creative thinking, it can be a grand exit.
John Cramer is a partner in the business law practice group at Wyatt, Tarrant & Combs in Lexington. Contact John at jcramer@
wyattfirm.com or at 859-288-7480.