Exit, Succession And Estate Planning For Baby Boomer Franchise Owners

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2 Exit, Succession And Estate Planning For Baby Boomer Franchise Owners Presented By Bruce S. Schaeffer President Franchise Valuations Ltd. (212) Michael H. Seid Managing Director MSA Worldwide (860)

3 The Demographic Imperative 40 Million Baby Boomers Aged 65+ In The US And 5 Million In Canada Projected To Grow To 55 Million By ,000 Boomers Turning 65 Each Day 3

4 Franchise Owners Are Getting Older Median Age = 45 to 54 28% Of Franchisees Are Over 55 Sources: Elizabeth Garone, The New Face of Franchisees, The Wall Street Journal, 8/19/13, citing FranDATA, Franchise Business Review 4

5 To Sell or Not To Sell: Nine Options 1. Sell Or Give Your Company To A Family Member 2. Sell Your Business To One Or More Key Employees 3. Sell To Your Employees (ESOP) 4. Sell Your Business To Other Shareholders 5. Sell To An Outside Third Party 6. Bring In An Outside Investor And Keep A Minority Interest 7. Go Public 8. Hire A Management Team To Take Over And Become A Passive Owner 9. Liquidate 5

6 Planning Control The Process Business And Legal Advisors Understand The Franchisors Requirements Existing Franchisees New Franchisee Family And Key Employees Franchisor s Right Of First Refusal 6

7 Four Key Elements of Planning Succession Plan Estate Plan Valuation Estate Tax Plan 7

8 Transfer Planning Restrictions In The Franchise Agreement Next Generation Planning Discuss With Franchisor Qualifications Personal And Financial Experience And Training Post Term Requirements 8

9 McDonald s Next Generation Qualifications Basically The Same Ineligible For Growth Ineligible For Next Gen Application, Interviews, Approval Approval Is Not Automatic 20% Equity In One Restaurant Prior To Training Up To 25% Gift Of Equity For Employees Buy Back Agreement Training Completed To McD Satisfaction Operating Experience As Manager 9

10 The Unexpected Transfer 3 D s: Death, Disability, Disaffection Decisions: Who Will Run The Franchise If The Principal Is Incapacitated Or Dies? Sell, Continue Or Liquidate? Have An Emergency Plan 10

11 Estate Plan Pre-death Planning Expands Options For Disposing Of Assets Avoid After-death Disputes Legal Documents = Blueprint For Desired Structure 11

12 Estate Plan Legal Documents 1. Pour-Over Will 2. Revocable Trust with Credit Shelter Trust Must be updated periodically Watch out for overfunding 3. Durable Power of Attorney (Financial) 4. Durable Power of Attorney (Health Care) - a/k/a "living will" or "health care proxy" 12

13 More Legal Documents 5. HIPAA Form 6. Irrevocable Life Insurance Trust 7. Grandchildren's Trust 8. GRIT, GRAT or GRUT 9. Charitable Lead Trust or Charitable Remainder Trust 13

14 Transfer to Non-Family Existing Franchisees and New Operators Qualifications Enhancing Marketability Condition of physical plant Key employees in place Trained employees Financial records Historic business performance and trends 14

15 Transfer to Employees Employee Stock Ownership Plans (ESOPs) Options to Buy Key man Insurance 15

16 Valuation of the Business Valuation by qualified expert is a key factor in all exit strategy planning to ensure you: Get a fair price (if selling) Apply appropriate discounts (if assets subject to estate tax) 16

17 What s It Worth? There are only three general methods that are acceptable for determining business value: Book Value ( Cost ) = Assets minus Liabilities The Capitalization of Earnings Method ( Income ) = the present discounted value of all of the business's earnings into the future The Comparable Sales Method ( Market ) = recent sales of similarly situated businesses 17

18 What About Rules of Thumb? Multiple-of EBITDA Is Popular Quick And Dirty But Ignores Variations In Growth Rates, Discount Rates, Terms Resale Value Of Other Franchises Existing Franchisee Vs. New Franchisee Existing Or Then Current Agreement 18

19 Estate Tax Plan Where the estate is worth more than $5 million Many franchise owners will qualify 50% or more of net worth can be tied up in the business Estate tax rates are 40%+ Can take advantage of valuation discounts for lack of marketability and minority interests Objectives: minimize taxes and avoid a forced liquidation 19

20 IFA s Statement of Guiding Principles While not transferring any equity in the franchisor s intellectual property to the franchisee, franchisees should have the opportunity to monetize any equity they may have developed in their business prior to the expiration or termination of the franchise agreement. Source: IFA Statement of Guiding Principles - Statement #5 of 12 20

21 Contractual Limitations on Transfers Understand Your Existing Agreement Franchisor Right Of First Refusal Transfer Existing Agreement New Agreement Full Term 21

22 The Transfer Process Understand Your Franchise Agreement Notification to Franchisor Approval of Transferee New or Existing Franchisee Family Members Franchisor s Right of First Refusal Possibility of Waiver 22

23 The Transfer Process Requirements for Capital Improvements Transfer Fee Training Effective Date of Transfer Waivers and other Transfer Obligations Post Term Obligations 23

24 The Transfer Documents New or Existing Franchise Agreement Disclosure Franchisor s Transfer Procedures Buy- Sell Agreement Consent to Transfer from Franchisor State Relationship Laws 24

25 Common Mistakes of Novice Sellers Lack of preparation. Sellers should have a plan/strategy to sell well in advance of making the sale. For most this should be at least three years out. Failure to have an accurate valuation done by a qualified third party expert. This in turn, gives sellers an inflated view of the value of their business. Failure to organize the books and records so buyers can do their due diligence. Customer/vendor/employee issues are not dealt with properly prior to sale. 25

26 More Common Mistakes Loss of motivation, passion, commitment and momentum resulting in loss of business value. Failure to de-emphasize the owners' personal role in the business. Failure to seek professional assistance and consultation with structuring the deal, securing qualified buyers and negotiating. Failure to maintain confidentiality. Failure to properly adjust for economic conditions and owner's ability. 26

27 Marketing Your Business Marketing Your Business Existing franchisees in system Franchisor resale program Franchisee in other systems Business Brokers Advertising 27

28 Closing Thoughts And Questions 28

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