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Exit Strategy

Transitioning Your Franchise to a Family Member

FranchisingLegacy

Like all entrepreneurs, franchisees should plan for the day they wish to retire or move on by mapping out an exit strategy. One option is to just let the franchise agreement expire, but another choice—popular with both franchisors and franchisees—is to transfer the franchise to a family member.

While it may be difficult to envision a successor 15, 20, or 25 years down the line, it’s best to plan for the possibility just in case. “My best advice,” says franchise expert and attorney Andrew A. Caffey,” [is to] anticipate the possibility of a transfer to children or another family member at the beginning of the relationship, when entering the franchise [agreement]. Make sure your franchise agreement accommodates your plans and does not discourage a family transfer in any unreasonable way.”

Caffey says that most franchise agreements go out of their way to assist in family transitions. Interior decorating franchise Decorating Den Interiors, for example, waives the transfer fee for transfers of interest made to a spouse or child.

“Our business is fairly personal in nature, being a service organization,” says Decorating Den President Jim Bugg, Jr. “After several years in business, usually 70% of franchisees’ business or more is repeat and referral. So when we have a next generation ready to step in and take over, often they’ve already been working together in the business and [the transition] just seems to make sense. We know the cost of acquiring a new franchise versus keeping an existing one going is significant so we think [a family transfer] is a smart business decision and good for everybody.”

Interim Health Care, a franchise that provides in-home care for seniors, also encourages family transitions. “We first look for solid business performance trends and then open a dialogue with our franchisee about who they have in mind for their successor,” says Kathleen Gilmartin, president and CEO. “Having stable results and a thoughtful succession plan helps lay the foundation for a smooth transition.”

Next-gen franchisees taking over the family business

Devin Ringling worked in his parents’ four Colorado Interim franchises for 13 years before he and his wife began to take partial ownership in the business. That was seven years ago. Today, they just finished buying out his parents’ Colorado Springs and Pueblo franchises; are majority partners in Denver, with another partner who bought out Ringling’s parents; and are minority partners in the Fort Collins location, of which his parents are still majority owners.

“Growing up with the business, I never wanted to work in it,” recalls Ringling. “After meeting with my parents at an owners’ meeting in Chicago [right after graduating college] and having the opportunity to talk with other second-generation owners, I realized maybe I was passing up a great opportunity.” He asked his father for a job and, two weeks later, moved back to Denver to learn the business from the bottom up.

Experiencing all facets of running the franchise is important for next-generation Interim franchisees, says Gilmartin. “There is no substitute for having family sit in each chair, from intake to scheduling to payroll and billing, to understand what it takes to be successful in health care. Experience is the best teacher to learn how to manage a profitable business.”

In addition to proper training (Interim encourages next-gen franchisees to go through new franchise training, and Decorating Den has a discounted “audit” price for new franchisees who want to bring along family members for training), there are also a lot of business ducks to get in a row before handing off a franchise.

“Franchisees need to be sure they have all the approved systems in place to facilitate a smooth transition and produce scalable growth,” says Gilmartin. “This includes a business plan, marketing plan, and budgets that project profitable growth for the next few years.”

Part of this planning is also recognizing that franchisees and their successors might have different management styles and learning how to deal with that. “My parents started with a small business in which they were able to be an intricate part of every aspect,” says Ringling. “As we grew, I knew that we would need people to oversee more of the business.”

To help smooth the transition, Ringling and his parents started working with Chuck Kocher, a business coach from Action Coach International. The family also hired Pass-It-On, a company that helped facilitate the complete buyout this past year. “It was good to have someone to bring up all the possible scenarios and to keep us on task,” says Ringling. “Both parties need to be concerned about the welfare of the other; the result will benefit all concerned.”

Today, Ringling’s parents have a two-year employment contract with him. At Decorating Den, Bugg says former franchisees often stay on as employees of their children: Daughters will take over the business, while their mothers will stay on as decorators, a position they can enjoy without having to run the day-to-day operations of the company.

“This business has been a part of my parents for 38 years. They will always have the wisdom and talent to contribute to our business,” says Ringling. “I will take as much of that as I can get. But they have also earned the right to name their own schedule. So now, if they want to take leave for three months in the winter—it gets cold in Colorado—they can.”

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About the Author

Laura Tiffany is a writer from Southern California who specializes in small-business issues.

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