How to pass your franchise to the kids? Very carefully
Longtime Pearle Vision franchisee Mike Arends is funding a transition period to pass his Minnesota operation to his daughters Maggie Arends, left, and Jessy Arends.
In the beginning, Matt Norman and his father, Mike Norman, created a written transition plan to serve as a guide while their Dale Carnegie Training operation passed from parents to child. While that doesn’t sound particularly earth-shattering, advisers on family succession say you might be surprised how few people actually take that essential step.
“The plan began with just the two of us talking about what we wanted,” says Matt the son, a conversation that quickly morphed to what each person really needed. “What I mean is, he dedicated his whole career to this business,” Matt explained about his father. “He would want someone to come in and pay premium dollars for this franchise. He would want to stay in this business for years. A lot of his sense of worth and so forth was tied up in this business.
“But what did he need?” He needed to sell the business for an amount so the parents would be comfortable, and “he needed a graceful exit and about one to two years of transition.”
And then it was the son’s turn. “What I said I needed was for me to be engaged in this business. I need to know that there’s a plan for me to have full authority and ownership over about a two-year time frame. That was where we started.”
From there, Mike Norman met with advisers, including an attorney, his accountant and a transition consultant. Then father came back to son with a draft plan, which they hashed out. “And then we got to terms,” says Matt, now in his early 40s.
Matt’s operation includes three franchise licenses. He bought the Minnesota and Iowa licenses from his father, and about two years ago bought the Nebraska/South Dakota combined territory from another franchisee.
Mike says he modeled the transition on what his own father did. “About two years before I purchased my first franchise from him we carved out a piece of geography” and Mike acted like a franchisee on that piece. “ I operated this territory, yet it was still under his ownership. And that was an extremely helpful process,” Mike says. “So often, somebody buys a business and ‘here are the keys’ so to speak and ‘good luck.’”
With his son, Matt operated a territory on his own, then became general manager of the company. “He had to make it work,” Mike says.
Another key to their success: “Every two months we had an open book financial meeting. I knew exactly what he was paying himself, and there was total transparency, and we discussed the financing and what expenses could be cut and what opportunities we had out there.”
Mike would often tell his son that once he became the owner, his mindset would change, but son Matt always said that wouldn’t be the case—he was completely invested, just as an owner would be. But then the actual transition occurred. “Once it was my money on the line, it elevated my sense of what was at stake,” Matt says.
Mike Norman, left, created a succession plan in writing for son Matt Norman.
‘It almost happened organically’
Mike Arends, the owner of Pearle Vision franchises in Minnesota, didn’t plan on selling his operation to his two daughters, Jessy and Maggie Arends, who are in their 30s. “I wanted them to go out and know they can do whatever they want. The sky is the limit,” he says.
But then Maggie, the elder daughter, went to college, worked at another optical business, received her American Board of Optometry certification, and “all of a sudden, things started falling into place,” he says. “It almost happened organically.”
Then Jessy finished a master’s degree and came home, working as a receptionist part time in the business. “She is such a people person and has such a fantastic smile, she was just made for it,” Mike says about his younger daughter.
Going forward, Jessy and Maggie will be 50/50 co-owners of the business in Minnesota, in a transition that will be complete in about a year. Mike will remain a 50/50 partner with another business partner in South Dakota, where they have two locations.
Mike says an outside firm did a valuation of the stores’ value. Mike will get his money out and set up a note for the daughters, with Mike providing the financing. He advises his daughters to stay as debt-free as possible. “When you’re debt-free and you don’t have a lot of pressures on that side of the equation, you’re able to formulate a plan that works good for the owner that is getting out and the new people coming in.”
Maggie says she has learned “so many things” from her father, but one thing stands out. “I have always been impressed and amazed with the type of trust he inspires in his employees, and his vendors and our patients. He has always dealt with everyone in his life with honesty and respect, and the trust that’s engendered by that is amazing. It’s a piece that holds up the business through any difficulty.”
Adds Jessy, about what she learned from her dad: “You want to constantly reinvest in the business on a financial level but also reinvest in your people. Bring them together,” she says. “People appreciate the feel when you say, What can we do for you? How can we make you stronger and more part of the team?”
As for Mike, now in his mid-60s, he’s proud and pleased. “When you have a family member in your operation, it’s just a different feeling. It just works so much better when you have that.”
Julie Bieszczat with her father, John Barney, operate 11 Wendy’s restaurants.
‘A substantial toolbox’
For John Barney, owner of Barney Enterprises, today an 11-unit Wendy’s franchisee, years of observation helped him to know his daughter, Julie Bieszczat, was the right person to take over the operation.
After college she went to work for a large company. “She got her MBA and continued to increase her responsibility and position. I kept thinking as time went on that this would be a real opportunity for us if she wanted to join our company,” he recalls. About 11 years ago, Julie did so.
He recommends any child prove himself or herself somewhere else before coming back to the family business. “When she joined the organization, she had a substantial toolbox that she brought to the company which was very beneficial to our organization and obviously to her.”
With Julie’s skill set evident, John had one other question: “The overriding concern or worry on my part would be, did she have the fire in the belly to want to be a successful person or did she not, and there was no question in my mind.”
Julie is the president of Barney Enterprises and John is the CEO. She says her father emphasized two things to her: “No. 1 there is no substitute for hard work. If you think you’re going to be the president, the CEO and you don’t have to work hard because you have a strong team beneath you, you’re wrong. Hard work is the No. 1 thing.
“The second thing is, always be prepared for the unimaginable, meaning financially make sure a war chest” of funds is available, she says. “There’s no substitute for having deep pockets to withstand” whatever happens.
Julie has advice for other children who might buy into their parents’ business. “Look at yourself and make sure that this is what you want to do,” she says. “Just because your father or your mother did that business, that doesn’t mean it’s right for you and you do your family a disservice if that’s not in your heart to do it.”
Adds John: “Don’t try to put a square peg in a round hole,” meaning even if your desire as a parent is to have your children take the reins, only take that route if it’s a fit. And then, let go. “You have to be willing to give the responsibility and relinquish the reins, and let the person run the business.” That can be tough for hard-charging parents used to being the boss.
As for how it has worked for him? “I want her to have the thrill of running it and for me it was easy to do and I love it. I’m the luckiest man in the world.”
Wendy’s exec aims to help ‘zees along succession path
Succession planning is a “fairly large topic of discussion” at Wendy’s, “just because we have an aging system,” says Kris Kaffenbarger, VP of global system optimization, franchise and portfolio management.
Many franchisees have “a large part of their net worth in their Wendy’s investment. We want to help them along that journey.” Here is some advice he shares with all Wendy’s operators:
1. Push your re-investment strategy to maximize the condition of the assets and the potential of the people who want to buy them. “It’s always easier to push the price on great-looking restaurants,” he said.
2. Benchmark your operating margins and improve your operating efficiencies, so if your utility bill is out of line or your trash service is higher than your peer group, “maybe re-negotiate your contracts and agreements, improve your profitability…and that too becomes more attractive for a buyer and improves your selling price.”
3. Don’t force an uninterested son or daughter into the business. Whether an owner is selling to a family member or outside, at Wendy’s everyone goes through the same process, he said. “My son will go through the exact same recruiting process, the same interviews, the same net worth requirements, the same background checks” and all other aspects that anyone will.
4. Wendy’s will not hesitate to reject a family member who is not qualified, he added, and he says often at first that causes “frustration” among the parties. “You kind of round the corner and you end up in, you know what? You’re probably right,” and the child really didn’t want to be the franchisee anyway.
“I’ve seen that many times where the child didn’t want to tell dad, 'I didn’t want to do that.’ It was mom or dad’s business. He’s got his own life or her own life. It’s like, let your child do whatever they want.”
Attorneys share family succession do’s and don’ts
John Berg and Scott Husaby have helped dozens and dozens of families pass franchise businesses to children in their work as attorneys at Monroe Moxness Berg. They shared some advice:
John Berg: A common mistake is when families “bring their child into the business and immediately raise them to the top of the pile and they irritate all the other employees along the way. They create a lot of animosity and disincentive.”
Scott Husaby: Many of the most successful, larger family-owned businesses will lay out strict requirements about training. For instance, the child may have to get a four-year degree; may have to spend time in another type of business; may have to build a separate career at first. And those requirements are clear throughout the organization. “At the end of the day there’s still favoritism for the family, but at least they know they’re going to” have to fulfill certain requirements.
John Berg: Another common don’t: “Parents have a hard time getting comfortable that the child is ready to take care of the business, or they want the child to do things exactly the same way that they did. Some parents are just overly critical about how they want things done. That can be a problem, too.”
Scott Husaby: Families often don’t devote enough attention to the financial aspects of the transaction. “They usually don’t have much for cash, so they have to start planning early for the financial outcome the parents want.” One tactic, if there’s real estate involved it can be separated from the operating business, and then ongoing rent can be paid to the parents. Another tactic is a consulting arrangement so parents are paid a fee in that way. “It’s always a balancing act. The key is really starting it early.”
John Berg: Fairness with multiple children doesn’t necessarily mean having things exactly equal. “Our position is we like to come up with a concept with the parents first and then make sure the kids are going to understand what that is, and have some acceptance. Happiness is meeting expectations, so if you have some sort of general expectations up front it’s less likely you’ll have fights.”