Have a Family-Owned Business? Here’s What You Need to Know.
It’s one of the great paradoxes of the family-owned franchise operation. The founder often starts the business to grow and create sustainable wealth for future generations. This involves risk; however, as the family expands across generations, they often stray from wealth creation into wealth-protection mode.
This evolution toward risk aversion is natural because successful families have more to lose, more stakeholders to satisfy, and often less innate entrepreneurial drive. But turning to a wealth-protection mode is not an ideal strategy to retain shared family capital across generations. It can reduce motivation for the next generation. It can put your business out of step with market forces and fail to tap into the growth instincts that make operating and investing families so good at what they do.
Generational continuity requires a growth approach that fits the needs of a family business and the franchise model in particular. Egon Zehnder, a leadership advisory firm, recently partnered with PwC and the John L. Ward Center for Family Enterprise at Northwestern’s Kellogg School of Management to develop solutions for family enterprise leaders looking to create sustainable wealth.
Every family-owned business must chart its own path, but an open and honest “who, what, why, how, and when” framework of inquiry can do wonders to set a family on the right course.
Franchise Succession Planning: It All Starts With “Why”
One question sits atop the plan: “Why keep the franchise operation in the family?” The answer seems straightforward. Franchisees are in the game of building long-term value by successfully operating multi-unit businesses. But plenty of family operations also view themselves as community pillars, providing a reliable, known entity within the community that gives back by providing employment and other community support.
Thinking of environmental, social, and governance objectives and building non-financial types of capital will act as glue across generations.
These “north-star” reasons need to be discussed in the open for the family to make critical decisions around generational involvement, use of assets, investment ideas, or business model evolution. And don’t limit the discussion of “why” to just the workings of the business. Thinking of environmental, social, and governance objectives and building non-financial types of capital – human, intellectual, social, and spiritual – will act as glue across generations.
Franchise Succession Planning: What Is The “What?”
As franchise businesses grow and diversify, fewer family members have a holistic view of the business. For clarity, you need an agreed-upon roadmap of definitions and motivations for growth. Descriptions may include both financial and non-financial considerations, such as:
- Enterprise value and profitability
- Enterprise breadth (diversity)
- Impact (industry, community, otherwise)
- Promotion of specific sectors or priorities (healthcare, education)
- Financial distributions to owners, job creation, and satisfaction.
The current and next generations also need to see the same context for long-term growth, both strategic and financial. What are our investable assets, and how are they positioned? What are our strengths and differentiators? Should we franchise new brands or concepts outside of our expertise? Are there paths we can take in real estate, private equity, or co-investing? If so, how do each of these options serve our family’s mission, values, and financial objectives?
When you’re talking about the future of a franchise operation, you’re talking about passing on not just one asset but a complex operation that may include several brands and locations.
None of this is an all-or-nothing discussion. When you’re talking about the future of a franchise operation, you’re talking about passing on not just one asset but a complex operation that may include several brands and locations.
Nor is it a one-and-done conversation. Aligning the “what” of the family business is ongoing work. Unlike most kinds of businesses, a franchisee signs up to use a brand for a finite period. This particular dependency on franchisors and brands assigns more urgency to the need for serious and frequent family conversations about growth and continuity.
Franchise Succession Planning: The Family “How”
The “how” question revolves around governance (decision-making, holding structures, policies, communication), human capital and operations (how to ensure we have the right people and processes in place to execute our mission).
Of paramount importance to family franchise businesses is knowing what role the current generation will play over time in running the operation, especially when they exit. You must decide if the next generation wants to continue as a franchisee. Unlike other family businesses, franchisee agreements have an endpoint, and the next generation must decide if they want to renew. But having a clear succession plan in place can help improve term negotiations.
Successful franchisees looking to create long-term continuity in their business usually look to extend their franchisor agreement as early as possible, on favorable terms, and franchisors are generally okay with that if the operator is in good standing. Involving family members earlier in the business can provide a clear line of sight for brands and set expectations on how your family will operate the business.
The best franchisors find a way to build relationships with their franchisees and understand what succession planning will look like.
The best franchisors find a way to build relationships with their franchisees and understand what succession planning will look like. Proving that your next generation is there to keep operations growing can support more aggressive negotiations with the brand.
Franchise Succession Planning: The Family “Who”
That brings us to the “who” of the ongoing operation. There are two crucial “who” questions to answer for growth planning. The first is on leadership: Who are the people “in the room where it happens,” and what are everyone’s roles? Granted, that should evolve and change over time, but it should include the younger generation when possible. Inclusivity is essential in establishing an enduring family enterprise system. But it needs to be clear who is making decisions regarding the purpose and mission of the family.
The second question may be better phrased as “for whom,” as in the constituents of our wealth creation are and how we define “family.” Clarifying this is more complex than it seems, with private equity investors often involved and definitions of a family being broader and more fluid than in the past. The family must also acknowledge the buy-in of non-family stakeholders, including senior management. Their voices count, too.
There is also a third entity in the family business: the franchisor. Their presence changes the dynamic. It means that there are a whole new set of deadlines for families to have conversations about involvement. And that brings up the last question.
Franchise Succession Planning: If Not Now, “When?”
Develop your continuity process as soon as the children are engaged and interested. Some children might say they have no interest at all, and that’s okay. They can still be involved as shareholders, if not operators, and sit in on board or shareholder meetings starting at around college age. Other children grow up assuming they’ll be operating the business.
Owners do themselves a favor by crafting formal employment policies about whether and how a family can enter and rise in an operational role.
Owners do themselves a favor for these children by crafting formal employment policies about whether and how a family can enter and rise in an operational role. How do they get paid? How will their performance be measured? Perhaps they need to work somewhere else beforehand or take a required amount of business education. To the extent families can tackle these questions upfront, you can avoid confrontations around fairness or having unqualified managers descending from the family tree.
Creating space inside your family for open and honest discussions – and starting with the fundamental questions like “why,” “what,” ‘“how,” who,” and “when” are the foundations for ensuring a smooth transition to an engaged next generation.
About the Authors
Chris Fuqua is a member of the Consumer and Retail practices for Egon Zehnder, a leadership advisory firm. Fuqua leverages his experience in the restaurant industry, the military, and business consulting to help clients overcome challenges.
Heather O’Keefe is the leader of Egon Zehnder’s U.S. Family Business Advisory Practice. She works with clients on succession planning, executive recruiting, and more.