Exit, Succession And Estate Planning · 2019. 12. 16. · Exit, Succession And Estate Planning For...

February 22-25, 2014 | New Orleans Convention Center/Hilton Riverside & Towers | New Orleans, LA

DRIVING GROWTH in CHALLENGING TIMES

Exit, Succession And Estate Planning For Baby Boomer Franchise Owners

Presented By

Bruce S. Schaeffer President Franchise Valuations Ltd. (212) 689.0400 [email protected]

Michael H. Seid Managing Director MSA Worldwide (860) 523.4257 [email protected]

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The Demographic Imperative

• 40 Million Baby Boomers Aged 65+ In The US And 5 Million In Canada

• Projected To Grow To 55 Million By 2020 • 10,000 Boomers Turning 65 Each Day

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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

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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

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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

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Four Key Elements of Planning

• Succession Plan • Estate Plan • Valuation • Estate Tax Plan

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Transfer Planning

• Restrictions In The Franchise Agreement • Next Generation Planning

• Discuss With Franchisor • Qualifications – Personal And Financial • Experience And Training • Post Term Requirements

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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

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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



Estate Plan

• Pre-death Planning Expands Options For Disposing Of Assets

• Avoid After-death Disputes • Legal Documents = Blueprint For Desired

Structure

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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



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

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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

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Transfer to Employees

• Employee Stock Ownership Plans (ESOPs) • Options to Buy • Key man Insurance

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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)

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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



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

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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



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

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Contractual Limitations on Transfers

• Understand Your Existing Agreement • Franchisor Right Of First Refusal • Transfer Existing Agreement • New Agreement – Full Term

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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

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The Transfer Process

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

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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



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



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



Marketing Your Business

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

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Closing Thoughts And Questions

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Give Us Your Feedback! • Log on to the IFA App. • Find our session under the appropriate day on the Schedule Tab. • Click on the green button that says “Tap

here to take a survey for this event.” • Follow along with the instructions. It will take just a minute or two but will help us for future programming! Thank you!!

Exit, Succession And Estate Planning · 2019. 12. 16. · Exit, Succession And Estate Planning For...

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