Earlier this year a successful Popeyes franchisee with nineteen units unexpectedly passed away. The operator was relatively young and had no clear line of succession. Within weeks, his corporation declared bankruptcy, leaving 500 employees wondering if they would keep a job and putting $30 million dollars of sale volume at risk for the brand. Within a matter of months, ten of the nineteen units were permanently closed. This story is a painful reminder why succession planning is critical. The loss of volume for the franchise, the forfeiture of jobs for the community, and the closed restaurant locations could have been avoided with a thoughtful succession plan.
The Avoidance Factor
Outside of the sudden and permanent loss of an owner, there are countless scenarios that could bring any business to its knees. Despite this, restaurant owners and franchise brands routinely shy away from discussions around exit strategies or succession planning. That’s a mistake since operational instability and risk to the unit can occur under multiple scenarios including, divorce, partnership splits, childcare or elder care, drug use, health issues, or even imprisonment.
Mark Twain famously wrote, “A man who lives fully is prepared to die at any time.” For restaurant owners, we’ll take creative license with the quote to say, “A man who owns a restaurant should be prepared to exit at any time.” Here are tips on how to make that happen.
A succession plan begins with operations. If you are in a hurricane zone, you have a readiness plan ready to go in case of an evacuation. Employ the same thinking for succession planning. Those in the restaurant business must have a written plan detailing who takes over the operations if an owner is no longer in the role. Sole operators should identify a clear chain of command with trained team members to step into required roles.
At one time, restaurant owners counted almost exclusively on their children to jump into this role but today, that is increasingly rare. The need to identify an operating plan is even more critical as America continues to age. The so-called “Silver Tsunami” created by a retiring generation is fueling estimates that roughly 10,000 baby boomers are turning 65 every single day between now and 2030.
Even if adult children are the backup operations plan, it may be wise to consider overall bench strength. These adult children may be preoccupied as primary caretakers for their aging parents, busy in another chosen career or simply unable to take the reins themselves in the short term. The business must still move forward whether they assume an ownership role or not.
If you have not confronted this issue, start with an honest assessment of your team members by core strength and tenure. Do you have loyal and responsible team members associated with the business? If so, it may be time to structure a buy in strategy for them. You could begin by gifting or selling them an equity stake in the business with an operating agreement detailing how they acquire the rest of the business over a determined number of years.
In the short term, you gain loyalty and commitment to the operation. In the long term, it may forestall a crisis if you can no longer operate. Rember that while operations may be covered by your bench, any would-be replacement may also need coaching or specific training to get them ready for all the management aspects of their role.
If you do not have someone you can groom to take over the leadership role and acquire the store, it may be time to get a valuation and consider selling the business. However, even with an eventual sale, the store must operate until the ultimate transition so that must also factor into your planning.
Take a hard look at your financial picture and cash position if you were out of the picture tomorrow. Do you have funds on hand to keep the business operating in the short and long term if you were incapacitated? Assume that when a restaurant owner is removed, profits and sales may shrink. Based on revised margins, make sure you have operating capital for at least six months. That’s an estimate for the time it may take to find a buyer for the business or otherwise stabilize operations.
One source of those funds could be a key person life insurance policy, separate from any proceeds going to the family, that is payable to the business. The last thing you want to do is pass on not only an operational burden but also a financial drain on your heirs to grapple with along with your care or loss.
Many operators keep their business totally separate from their spouse. That could be an issue if the spouse who is shielded from the day-to-day operations, doesn’t know how to gain access (or is not listed) on the bank accounts. Without access to banking, which could take days to establish, there is no way to pay bills, fund payroll accounts to cover taxes, or do the things that keep a business running.
This is not legal advice but an admonishment to seek an attorney’s counsel. You need to understand and make decisions about how to transfer the business if you are incapacitated or not available to sign the paperwork. Is there a mechanism to transfer and sell the business as part of your operating agreement? This is especially important if you have business partners. There should be an automatic buy-sell agreement in place between the partners if one falls ill or passes on.
If there are no partners, your spouse or family may locate a qualified operator of a similar location ready to step up and take over, but they need the legal authority to sell. Think of this like your living will where someone has the authority to make your health decisions. Make sure there is a document, especially as a sole owner, that gives similar authority for someone to make decisions if you are no longer able to do so.
Restaurant owners should also consider moving the assets of the business into a trust. There are tax and timing benefits to this scenario. Transferring the assets in advance into a trust allows the assets to be handled separately from the probate for the rest of your estate. Probate can be quite lengthy and is public in all states so there are also privacy concerns you avoid by forming a trust.
These are only some of the many uncomfortable decisions you should be making before it is too late. In addition, family members, employees, and key operating partners must be on board with your wishes. At the end of the day, a succession plan should include a strong look at operations, financial stability, and legal transfer. These issues for success planning should be as much a part of the business plan as capital improvements, expansion, lending, or other financial planning exercises.