One of our founding partners, Michael Einbinder, recently addressed a group of restaurant franchisees concerning transferring their respective franchise(s) to the next generation, a concept often referred to as succession planning. Arranging to have an existing business transferred to the owner’s family, children or desired operator requires a plan that involves estate planning (Wills, Trusts, etc.) and forward thinking business agreements.
Franchisees interested in succession planning must be made aware of certain critical legal and financial issues, including the effect on estate taxes of a lifetime transfer of a business. Transfers without consideration during one’s lifetime are gifts. From an estate tax perspective, gifts reduce the estate tax threshold of the person making the gift and after death, that person’s estate would have to pay taxes on the amount of the estate that exceeds the estate tax threshold. However, with advanced preparation, a franchisee interested in succession planning can implement a plan to minimize tax burdens.
An equally important consideration for any franchise succession plan is how best to accomplish a transfer in accordance with the franchisor’s requirements. Typically, franchise agreements limit a franchisee’s ability to transfer the franchise and in many instances give the franchisor an option to acquire the franchise. That option, if exercised, would defeat the franchisee’s goals of passing on the franchise to the next generation. Thus, a smart succession plan involves getting the franchisor on board early in the process so that the franchisor can become comfortable with the future operators of the franchise. We recommend that existing franchisees groom successors for management and have them develop relationships with the franchisor, creditors, vendors and employees. There is no better time to start paving the way for an orderly transfer than today. By doing so, the franchisor is likelier to remove obstacles to transfer.
A recent article in Restaurant News highlights the shift from experienced original franchisees to second-generation, younger operators. The article credits younger operators with being tech-savvy, being quicker to remodel and delivering a fresh perspective and new marketing ideas. However, the downside to younger operators can be a lack of experience and access to capital. With careful planning, an original franchisee can bring the younger operator on board in a way that allows the younger operator to gain experience and also provide the younger operator with sufficient capital (or access to capital) to operate and grow the franchise.
A business operator interested in planning for the next generation would be wise to consult with a knowledgeable attorney.