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Unclear exit strategies cloud chains’ outlooks

Unclear exit strategies cloud chains’ outlooks

Able to drive the lane against his teenage grandsons while playing basketball at his Colorado vacation home, the 67-year-old franchisee of three budget steakhouses thought he was in great shape, financially and physically.

The restaurateur, whom we’ll call “Warren,” though that’s not his real name, had built a reputation as one of his brand’s most distinguished operators. He was proud of his operations, in a Mississippi River resort town area, and often told his wife he was going to “work until I dropped.”

But it wasn’t until 14 months ago, when a doctor told Warren that his chronic lower-back pain and urinary problems actually were symptoms of prostate cancer, that he began thinking about such weighty issues as business succession planning and an exit strategy.

Those delayed considerations generated even more stress a week after his diagnosis when it became clear that neither Warren nor his son, who has a master’s degree in business administration, could decipher the language and calculations in the buyback clauses of his franchise contracts.

Franchisees’ poor succession planning concerns chains

For older restaurant chains, situations like those confronting operators like Warren are among the worst nightmares they face in the 21st century. Such high-achieving franchisees—people of a certain age and tenure who think they are going to run their businesses forever—too often have no succession plans to guide their businesses through the inevitability of death, illness or just their desire to retire in comfort.

“It’s silly not to think about it, and yet if you talk to any insurance man, estate lawyer, tax consultant, it is the one topic that they’ll tell you nobody wants to talk about: mortality,” said Jim Stansik, executive vice president of franchise development for the 8,000-unit Domino’s Pizza chain based in Ann Arbor, Mich.

Fourteen months after his diagnosis, Warren says his health is relatively OK, and he has worked out a succession plan to sell two of his restaurants to a team of managers. A son may acquire the third outlet before Warren’s contracts begin expiring in 2011, ending a 30-plus-year career.

Though people like Warren are said to represent a small number of operators in the industry, franchisors insist that they are hardly blasé about older operators with five or fewer units who are not preparing for retirement or worse.

While most franchisors, consultants and franchise leaders don’t consider the number of franchisees who might be avoiding succession planning to represent an emergency, they acknowledge that the smooth transition and continuity of a chain’s operations demand that such operators develop end-of-career contingency strategies.

What’s prodding many franchise brands to factor aging operators into their growth outlooks is that the largest generation of Americans to ever leave the workforce—the 97 million-strong baby boomers, a third of the country’s population—will begin retiring over the next 20 years, including a substantial number of lifelong restaurant franchisees.

For at least one major brand, KFC, the demographic shift may lead to a decline in the chain’s number of domestic branches in the coming years.

Just a month ago, David Novak, chief executive of Yum! Brands Inc., which owns the 5,500-unit KFC system, told investors that the quick-service chain could show “no new net unit growth” from 2007 through 2008 because the older operators of some 200 to 300 outlets may opt to close shop or let their contracts expire rather than invest in a mandatory, systemwide remodeling project with a June 2008 deadline.

‘Not a fun topic’

Some restaurant franchising executives and industry consultants say getting licensees to consider that they may one day need or want to separate themselves from their businesses is a tough conversation many would rather not have.

Domino’s Stansik says he is devoting more time to making sure that his franchisees think about succession planning. Unlike with many other restaurant chains, Domino’s franchises are not offered to entrepreneurs who have no prior affiliation with the brand. Candidates for Domino’s franchises work for the company, work for a franchisee or are blood relatives.

“In our own case, our business grew dramatically in the 1980s, but we had franchisees in the system way before that, and now we have a number of operators who have been with us for 30 years,” Stansik said. “But when they hit their 50s and 60s and we ask them about their succession plans, so many have given it no thought. And the reason for that is it’s not a fun topic. But I think, as franchisors, we have to bring it up.”

Geoff Hill, senior vice president of franchise sales for Atlanta-based Focus Brands, parent of the Carvel and Cinnabon brands, says it never ceases to bemuse him how franchisees of a certain age can be the sharpest businessmen until it comes to the topic of ending their careers.

Noting that the 70-plus-year-old Carvel has been franchising since the 1950s, Hill observed: “I look at our own franchisees in Carvel, and most of them are great operators. They know how to run a business. They know how to sell ice cream and ice cream cakes and serve our customers. But they don’t know anything about selling a business. They’ve never had to do it before.”

On average, about eight to 11 Carvel franchisees retire from the 330-unit chain each year, although in some years as few as five leave the system, Hill says.

Smaller operators need the most help

Matt Shay, president of the International Franchise Association, contends that larger franchisees tend to be better prepared than smaller ones.

Almost every mature brand that’s at least 50 years old, he says, can count among them a few operators like Wendy’s largest franchisee, the 160-unit DavCo Restaurants of Crofton, Md., or Hardee’s largest franchisee, 320-unit Boddie-Noell Enterprises of Rocky Mount, N.C., that are hundred-million-dollar-plus corporations with sophisticated succession plans taken straight from the Fortune 500’s playbook.

However, the challenge within even the largest, oldest brands is the large number of operators with fewer than five units.

Ann Dugan, assistant dean of the Katz School of Business at the University of Pittsburgh and a leading expert on succession planning in franchised businesses, says she began receiving calls 10 to 12 years ago from major restaurant brands seeking help for their franchisees in planning career-ending transitions.

“The conversation generally went along the lines that we have a number of franchisees in their 50s, but their children are not interested in the business, nor do they have any managers with the capital to acquire the business,” she says. “So what will happen to those units?

“It was a delicate conversation because if you have a successful franchisee who has been in the business for decades, he no longer has to, or wants to, put in 60-hour work weeks, he sees no reason why he has to go away. But that does not relieve the franchisor from paying attention to educating the franchisee about succession planning,” Dugan says.

“A good succession should consider family, the franchisor and other franchisees,” she adds.

Susan P. Kezios, president of the American Franchisee Association, says she urges her members to begin thinking about an exit strategy on the day they sign their contracts.

“We tell folks who are purchasing a franchise to think about getting out at the same time they are getting in,” she said. “Have an exit strategy ready on day one.”

Kezios advises franchisees to consider that over the life of a 20-year contract, market economics may turn south, partnerships can turn adversarial as franchisors sell the business, and children may not want to take over—all factors that can depress the equity value of a franchisee’s business.

Pushing the topic of transition

John Kujawa, vice president of franchising for McDonald’s USA, says that every year, on a regional basis, all franchisees in the system sit down with the company as part of their annual business review and are asked two questions: “Where do you want to grow? Where do you want to go?”

He says that given the turnaround his Oak Brook, Ill.-based chain has been enjoying since its reimaging campaign of 2002, resulting in 43 months of “extremely strong comp-store sales increases,” most of McDonald’s older franchisees are thinking more about renewing their contracts, not retiring.

Nothing speaks more to that motivation than the re-signing of a 90-year-old female operator in Ohio, he says.

“We are looking at individual owners who are saying that despite having a huge amount of equity in the business, they still want to renew, reinvest and keep going,” Kujawa said. “They are being rewarded with great sales volumes and when the day does come to sell, they are reaping the rewards of their hard work and pulling out of the system with a lot of money. But it is not happening in great numbers.”

Nevertheless, Kujawa notes, family transitions are growing.

“We like to say that our operators have ketchup in their blood,” he said, “and it could be genetic when you look at the number of children in their 30s and 40s who are doctors, dentists, lawyers, MBA grads, who are leaving other successful careers to take over their parents’ businesses. It is really gratifying.”

McDonald’s fosters such generational continuity by striving to motivate children and grandchildren of franchisees to pick up the baton when their parents leave the system.

However, there is no guarantee that younger relatives can successfully follow in their parents’ footprints, Kujawa acknowledges. Heirs must submit to the same rigorous training practices and master the business skills that made their parents successful, he says.

At Domino’s, where all franchising is internal, the company has a unique regeneration program of its own. Stansik said the company has an annual summer internship during which a dozen or more college-age children of franchisees work in all departments of the corporate headquarters in Ann Arbor, Mich., to get them interested in the business.

“But we really do have to push the topic about transition,” he conceded.

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