3 options for succession planning in a post-Covid world
As the franchise continues to recover and evolve from Covid-19, and with renewed caution regarding the delta variant, management teams have mainly focused on operations. Everyone is exhausted from crisis-type staffing and recruiting efforts, supplier disruptions, tight cash flow, and changing local and national Covid mandates and recommendations.
While everyone is tired, it’s important that franchisors and franchisees don’t overlook long-term plans and planning opportunities and prioritize the assessment and review of their estate and succession plans. This is especially true now, with valuations of companies constantly changing due to the pandemic and the potential tax reform looming in Washington. Businesses and franchise owners should review capital structures with debt and equity partners and ensure alignment around the planning and execution of potential exit strategies in conjunction with the plans. of succession.
Franchisees have all been severely affected by the pandemic. In many cases, owners continue to deal with declining cash flow because their businesses have not fully recovered. Some reductions are linked to staffing, others are specific to certain segments that are more affected than others. These include full-service restaurants, health and fitness, and other businesses where customers congregate in defined indoor locations.
On the other hand, businesses with drive-thru access, cutting-edge digital platforms, and early and innovative adapters to improved take-out and delivery platforms have flourished. These changes in the market can have a significant effect on the timing and execution of a successful succession plan.
As a first step, franchise owners should review current business valuations and capital structures. A lot has changed during Covid. Some owners are more keen on selling, others are looking at their brands, portfolios and expansion opportunities for the longer term. In businesses with multiple partners or institutional ownership, the output parameters and outlook may have changed.
In some segments, banks and capital providers will support continued growth with modest equity or embedded equity. In others, growth will be more difficult and require a larger equity component. In disputed brands with uneven performance, a sale may now require partial financing from the seller. If your business is in expansion mode, be sure that lenders will support your efforts. Financial institutions and financial partners have also been affected by the pandemic.
As franchisees and brand owners consider alternatives, one of the main inputs is the owner’s position in the lifecycle of their business. Is the owner able to sell, financially and emotionally? Does the company have financial partners and how do their timetables and goals align? As owners assess the alternatives, there are three main options to consider when evaluating the succession planning and liquidity event alternatives.
1) Business transfer to the next generation. For family businesses, the best plan may be to keep the business and pass it on to the children or the next generation of owners. Often the goal is to transfer ownership of a business to children over time through donations, with as little tax impact as possible on the owner’s estate. Based on the patchy performance throughout Covid and the lingering uncertainty about future variants, for companies affected by the pandemic, now may be a great time to take advantage of valuation drops and donate a interest in the business and / or accelerate future gifts for tax purposes.
Here are some other factors to consider when deciding to transfer your business to the next generation: Do they even want to run the family business? And do they have the skills to continue to operate it successfully? The last thing an owner wants to see is that their business fails in the hands of their children and value is lost, when a better alternative would have been to sell to a third party.
2) Partner buyouts. For businesses with multiple shareholders or partners, another alternative to succession planning is for an owner to transfer or sell their stake to one or more of the remaining shareholders or partners. This can be an ideal solution when members of ownership groups have different time frames and / or investment goals. Planning and executing partner or shareholder buyouts can also be done with greater certainty as to timing and value, as the terms of the deal can be agreed in advance and do not depend on unknowns from a third-party buyer. Assessment, however, can be tricky. Is the business valued as a going concern, or as it would be when sold to a third party? In the case of real estate, liquidity events can branch off between corporate assets and real estate assets. The flexibility of real estate alternatives and more definitive appraisals can often be used to find a solution. Plan a timeline to approach your partner (s) and close a sale. Propose a solution ; plan before approaching other stakeholders.
3) Sale to a third party. Performing a process to maximize the value of a third party sale may represent the best alternative for businesses and franchise owners. While current franchise mergers and acquisitions market conditions vary widely across brands, geographies and industry segments, the continued strong performance of some brands across Covid, with increasing sales and widening margins. , resulted in higher valuation multiples and broader buyer pools. The increased involvement of the franchisor in selecting buyers makes planning for franchisor approval the most critical part of the merger and acquisition process. When do a seller and a buyer involve the franchisor, and at what level?
Whatever path or combination of paths a business or franchise owner chooses, it is important to have a succession plan in place and to continue to re-evaluate that plan in light of changing business conditions and of the market.
Carty davis is a partner of C Squared Advisors, a boutique investment bank that has completed hundreds of franchise and multi-unit restaurant transactions. Since 2004, he has been a regional developer for Sport Clips in North Carolina with over 70 units. Contact him at 910-528-1931 or [email protected]