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Developing a strategy from the start can make long-term planning more efficient.
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For more than 150 years, franchising has provided a viable path to business ownership for countless aspiring entrepreneurs across the world. We know that franchise owners come from all different walks of life and their reasons for investing in a franchise can vary greatly. Whatever the case may be, for many people, investing in a franchise business marks a significant moment in their lives.
That’s especially true for franchisees of home service brands, as typically these concepts have owner-operator business models, meaning that franchisees are usually very involved in the day-to-day operation of their company.
When the day comes that the business owner starts thinking about retiring and passing down the business to someone close or a partner, it’s important for whoever is taking over to have a deep understanding of the ins and outs of the company. That’s why it is never too early to develop your succession plan.
When it comes time to sell, whatever the circumstance may be, having a succession plan in place helps to ensure that the purpose you set out for your business is being fulfilled even after you’ve handed the reins to someone else and that you’re gaining the maximum return on your investment.
Why it’s important In the book 7 Habits of Highly Effective People by Stephen Covey, Habit 2 is “Begin With the End in Mind.” The purpose of succession planning is to sell your business at a time that you want, for the amount you want, to the person you want.
“Have a long-term plan in place and to plan for selling your business at the end of it”
There is a 100 per cent certainty that at some point you will exit the business you start, and it may be a time of your choosing or it may not. Having a succession plan in place can help ensure that financial resources for you or your family or your heirs are available at the time of exiting the business.
The first question I ask a new franchisee is: What does your business look like 10 years from now? The succession plan starts with a series of key questions like: What will your business be worth when you want to sell it? How can you set your business up to ensure that you get maximum value for when you sell it? Who will buy your business? Will you sell it to a stranger, a competitor, a fellow franchisee, an employee, or a family member?
From there, the succession plan centers on the idea that you will develop your own buyer through structured planning to make sure they have the funds available for the down payment at a preset price.
My suggestion is to have a long-term plan in place and to plan for selling your business at the end of it. It begins with a 10-year plan, setting a goal that at 10 years from this date, you will sell your business for a certain amount, regardless of whether you prepare to do that or not. If you have a strategy in place, you have a target to shoot for.
There is a profit level that will create the value that you set, and a revenue level that will create that profit. Then you work backward and build a detailed five-year financial, organizational, and marketing plan. You also need to think critically about what will make your business an attractive one to purchase and what factors can change the value.
The most important factor in making your business attractive to buy is to make it independent of you, the owner. Make sure that your customer relationships are not solely centered on you. If your customers only have a relationship with you, then it is perceived that some might leave when you do and your buyer will account for that when making their offer.
Other key factors include having a very well-trained staff; revenue diversification (from multiple locations or multiple service lines); clean and complete financial records; detailed customer records; and sustained growth.
“The most important factor in making your business attractive to buy is to make it independent of you, the owner”
Financial statements are the story of what your business can provide to a buyer, and your tax returns need to match your financial statements. One important note is that banks most often define the value of a given business based on the requirements they set for making the loan.
The idea that every business owner should focus on developing their own buyer is an important one. In developing your own buyer, you are allowed to set the price without negotiation. You set the terms and the timeline, and provide continuity to the business and its employees.
My advice is to avoid placing your business for sale on the open market. You do this by preparing and developing a key employee or group of employees – which can include a family member – into a potential buyer. This is most often accomplished by providing them a pathway to developing a down payment that they will need to finance and purchase, known as implementing a “Golden Handcuffs” plan.
A Golden Handcuffs plan provides the designated employee an incentive that generates loyalty, dedication, and creative thought. There are three general methodologies for Golden Handcuffs including the split dollar, in which you have control as the owner; executive bonus plan, which the employee controls; and non qualified deferred compensation plan, which is the easiest but also has the highest risk.
These plans can be long term – five to 10 years – or short, depending on circumstances – two to three years. But they must allow for the appropriate down payment to be accumulated. Specific policy terms must be explored by an appropriate financial advisor.
By developing a succession plan for your home service business, you’re ensuring that your purpose for starting the business is fulfilled and that all stakeholders, including employees, are being considered and taken care of after your departure.
Michael Pearce is the chief development officer of home services parent company Authority Brands, which has over 1,900 territories throughout the world.
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