International Franchise Association Convention panelists for the “Succession and Pre-Transaction Planning session included (sitting left to right) Todd Recknagel, managing partner at Three20 Capital Group, Aaron Chaitovsky, partner at Citrin Cooperman Advisors and franchisees Indi Nandhra of Mathnasium and Al Rodriguez of Sport Clips. Mitch Cohen, partner with PerforMax Franchisee Advisors (standing) moderated the discussion.
It often takes a major life-changing event to prompt franchisees to consider succession planning. For Al Rodriguez, it was his divorce and an injury that forced him to prepare for the eventual transfer of his business.
“With my son now involved with the business and also my financee’s child, it makes you think about everything, about what’s next,” said Rodriguez, who owns 35 Sport Clips locations in northeast Ohio and western Pennsylvania and recently signed a franchise deal with Dogtopia. “At the same time, it’s gotten more complicated” as he plans for a fair transfer ownership of the business “when I step away from it all.”
Rodriguez, who grew up as one of seven children with divorced parents and living on welfare, said he got into franchising because “I wanted to make sure my kids were in a position to have a different path than me.” He admitted he didn’t even think about the future of his business when he retires until he ruptured his Achilles tendon and was restricted in what work he could do.
“Succession plan is top of my priority list now because I want the business to continue and my son wants to continue with it,” said Rodriguez, who hired a succession planning company to help facilitate the transfer of his business when he steps away.
Indi Nandhra shared a similar story at this year’s International Franchise Association Convention in Phoenix. She was a Goddard School franchisee for 18 years before a divorce forced her to sell her business and give up a substantial amount of the profits as part of the settlement. She said she was easing into “pre-retirement” mode when her son unexpectedly quit school and told her he wanted to buy his own franchise.
The Nandhras agreed to go into business together and become Mathnasium franchisees, with mom putting up the financial capital to buy their units and son overseeing the day-to-day operations of the business. She said her family now co-owns five locations in Georgia.
But things got complicated when Nandhra’s daughter entered the family business and took over an existing Mathnasium location. Soon after, her son requested a meeting with Nandhra and said, “There’s too many chiefs and not enough Indians” in the family business.
It forced the Nanhdrahs to align their skills and roles in their business and establish better communication channels, because as mom said, “My children come from different angles and we really struggled with how to balance family versus business.”
Nandhra, who like Rodriguez sits on the IFA board and serves as chair for the Franchisee Forum, said her family business is in the process of restructuring its LLC to help decrease its tax liabilities when the business is transferred to her children.
“Succession planning is inevitable, so start the process now,” said Aaron Chaitovsky, who joined Rodriguez and Nandhra as a panelist for a “Succession and Pre-Transaction Planning” breakout session at the convention February 18 along with Todd Recknagel, managing partner at Three20 Capital Group.
Chaitovsky leads the franchise practice at Citrin Cooperman, which focuses on audit and accounting, business consulting and advisory services for franchisors and multi-unit franchisees. Because there are a lot of tax repercussions when a business is sold, he urged franchisees to hire a professional accounting firm for advice on how best to reduce them.
Other action items the panel recommended for franchisees preparing their succession plans is to review the franchise agreement and notify the franchisor of an intent to leave the business. They also said it’s important to align skills and roles when bringing family members into the business and establish operating agreements for family governance.
Mitch Cohen, a partner with PerforMax Franchisee Advisors and a Jersey Mike’s Subs and Sola Salon Studios franchisee, referred to “The 3 Ds”—divorce, disability and death—as the most common life events that prompt a franchise transfer process.
He and Recknagel recommended that franchisees consider selling their businesses to another franchisee or even a private equity company as a way to avoid potential family conflicts. “They are numbers geeks and work with a proven playbook” and the good ones will figure out what your company is really worth” with the hope of offering you a fair price, he said about outside investment companies which are pouring more money into franchising than ever before.
“It seems to me that selling your franchise to a family member is a lot harder than selling to an independent,” Cohen said.