The Secret To Longevity in a Family Business Franchise? Know Your 5 Rights
How do you make a family business franchise last for generations? In working with family businesses around the world we found that the key to building sustainable family enterprises can be found not in the specifics of the business, the industry, or the geography, but rather in how you understand and exercise the power of ownership.
Ownership of any asset confers the power to fundamentally shape it, so understanding how to harness the rights of ownership is essential.
Ownership of a business brings with it five core rights:
- Design: What ownership configuration do you want?
- Decide: How will you structure governance?
- Value: How will you define success?
- Inform: What will—and won’t—you communicate?
- Transfer: How will you handle the transition to the next generation?
Understanding and effectively exercising these rights can lead to long-term success. Misdirecting them can destroy what you have spent years building. Even with the limitations imposed by a franchisor, we’ve seen franchise owners use the five rights of owners very effectively to shape their business. Below we identify the key questions you should ask to harness the five rights and sustain the business for generations.
Design: Like an architect building a blueprint, the owners give a business its basic shape. As a franchisee, you need to fit the basic design of the franchisor’s model, but you still have plenty of leeway to design your business by addressing these questions:
- How much concentration do you want in a single business vs. diversifying into other investments? While franchisors typically prefer franchisees concentrate time and capital on their business or industry, franchisees often take a portfolio approach. We find that franchisors are more likely to approve of diversification if you meet their performance expectations and keep them informed of your plans.
- How will you share ownership within your franchise? Some families only share ownership with those working in the franchise, others allow all family members to be owners. Some franchisors require the family to designate one person to have voting control, while others are more flexible.
Decide: The owners of a business can make all the decisions if they want, from broad strategic issues to operational details. As your business grows, it becomes impractical to make all those decisions, so you need to delegate and build up your governance structures and processes. As you do, consider these questions:
- Have you clarified how you will make the different types of decisions within your franchise? Franchisees have multiple roles to manage – as owners, board members, managers, and family members – and often lack clarity on what decisions and conversations they should be having in each of those roles. We recommend franchisees clearly define the decisions they make and identify the appropriate franchisor with whom to build a relationship for each of their roles.
- Do you have the right policies in place? One of the best ways to manage conflict on a difficult issue is to create a policy that sets out the rules in advance. For example, have you set clear expectations about whether family members can work in the franchise? Identify the potential “hot spots” within your family franchise and work to create policies that address them.
Value: One of the most important rights of ownership is to define what you value. You need to meet the performance expectations of the franchisor, but still have plenty of leeway to set your own objectives. To do so, explore these questions:
- What are your goals for the franchise? One franchisee we work with placed a high priority on being at the top of the list for new store opportunities. She reinvested most of the profits from her current franchises back in the business and built up her team, infrastructure, and capital pool. She kept her franchisor informed of her goals, performance, and readiness to expand. Another wanted to use profits to send his children to college, which meant less aggressive growth. He also kept his franchisor informed of his goals, which created the environment for effective conversations any time the franchisor approached him about investments that were misaligned with the liquidity goal.
- How will you measure success? Franchisors are often publicly traded companies with obligations to the markets. We worked with one franchisor to develop a clear set of financial and nonfinancial metrics they wanted from each franchisee and to help the franchisees develop the information systems necessary to efficiently provide that data. One franchisee told us it was huge relief to know exactly what the franchisor needed from him. He organized his internal dashboards and systems to focus on those metrics, becoming a top performer and a valuable partner to the franchisor.
Inform: Private ownership allows franchise owners to be exactly that: private. Other than sharing information with the franchisor, they can choose to keep everything to themselves. But communication – with the next generation, spouses, employees, and the community – is critical to building the trusted relationships that family businesses need to succeed. As you decide how to exercise this right, consider:
- What information will you share with your key audiences? For example, spouses play a critical role in raising the next generation. Be careful about keeping them too far removed.
- What communication systems do you need? Collaborate with your franchisor partners to ensure alignment on the types of data and the frequency and method for sharing it. That will help your franchisor meet its information needs and improve your relationship as a result.
Transfer: Franchisees are often surprised to find out that their transfer plans do not meet the franchisor’s expectations. To manage the complex set of issues, we recommend creating a detailed “Continuity Plan” that addresses:
- How will you pass ownership to the next generation? Many franchisees plan to transfer their assets equally to the next generation since the vast majority of their wealth is tied up in the business. However, many franchisors, require each franchisee to have a primary owner, whom they need to approve, with voting and economic control.
- How will you hand off key leadership roles? If you don’t define and seek franchisor approval for your timeline, you may be surprised by the conversation with your franchisor that makes you feel: “I am being forced to retire from my business.”
Generational transitions bring an opportunity – and a necessity – to review and update your decisions on each of the five rights. The long-term health of your franchise may depend on it.
Originally published on FranchisingUSAMagazine.com, 2 March 2021.