Securing your franchise
Strategies for estate planning and business continuity
In an unpredictable world, securing the future of your franchise has never been more crucial. Over the past few years, the franchise community has faced significant challenges, including the effects of COVID-19, the loss of owners and staff, and disruptions from looting incidents. These events have highlighted the importance of being prepared for both business and family impacts. At Standard Bank, the Franchise team understand the unique challenges you face and offer comprehensive solutions to mitigate risks and safeguard your business's future.
"In many instances, we found that there was no planning. When an owner passed away, the brand and the family often did not know the deceased's wishes for the business or the legal complications that followed. Proactive and ongoing planning were rarely prioritised," says Andre Beck, Head of Franchising sector at Standard Bank South Africa.
Beck emphasises the need for understanding the correct documentation required, which takes precedence when making decisions about the future of the business and worst-case scenarios. "More importantly, it is vital to have a clear arrangement in different ownership structures, whether there is more than one owner or partner, a key person in the business, or a sole owner."
"Understanding the rules of the Franchise agreement and ensuring they align with your business insurance is critical. Furthermore, there must be clear instructions to any creditors, suppliers, and banks articulating how the business is insured," Beck adds.
With these challenges in mind, Standard Bank Franchising sector will explore critical aspects of business owner risks, the importance of estate planning, and how tailored insurance policies can provide a financial safety net for your franchise.
Comprehensive Business Assurance Planning
Liberty, a trusted partner of Standard Bank, offers holistic financial planning solutions, including business assurance, personal financial planning, wealth creation, estate planning, corporate benefits, and short-term insurance. Specialised advice from legal experts ensures your business is well-protected.
Business Continuation Risks
One significant risk for franchise business owners is business continuation risk. The sudden demise or disability of a business owner can create uncertainty, impacting both surviving business partners and the deceased’s heirs. A buy and sell agreement funded by life insurance is a viable solution. This agreement ensures the smooth transfer of business ownership and provides financial stability for all parties involved.
When considering business continuation, it’s essential to balance the interests of the surviving shareholders with the interests of the heirs of the deceased. This ensures the business continues for shareholders and protects the financial interests of the estate.
Determining who the new business owner will be – whether a surviving business partner, a third party, or an heir – is critical. Contracts must be in place, wills updated, and funding secured, typically through life insurance, to facilitate the purchase of business shares from a deceased shareholder.
Surety Risks
Another critical risk is surety risk, which arises from suretyship agreements and outstanding debts that can hinder business continuity if a surety passes away or becomes disabled. Contingent liability insurance offers a financial buffer, ensuring debts are settled, and credit lines remain open. This protection extends to the surety’s estate, mitigating potential liabilities.
Keyman Insurance
The loss of a key individual critical to the business’s profitability can also disrupt operations significantly. Keyman insurance provides funds to sustain the business, recruit, and train a suitable replacement, ensuring minimal disruption and continued profitability.
Importance of a Well-Structured Estate Plan
A well-structured estate plan and a valid will are crucial for business continuity. Without these, the business could face prolonged legal battles, liquidity issues, and potential collapse. Estate planning ensures that your business can navigate the transition smoothly, preserving its value and operations. Key considerations include defining clear directives for the business’s leadership in your estate plan and ensuring that your buy and sell agreement, last will and testament, and memorandum of incorporation (MOI) are aligned to provide a seamless transfer of ownership.
Franchise Agreement Considerations
Franchise agreements often contain clauses that can jeopardise business continuity, such as joint liability for debts or the requirement for franchisor consent for ownership transfer. These risks can be mitigated through meticulous contract negotiations and estate planning backed by comprehensive insurance solutions.
Succession Planning
Succession planning is vital for preserving brand integrity and operational consistency. It ensures that your franchise maintains its standards and continues to thrive even during ownership transitions. Failing to integrate estate planning with business continuity strategies can lead to significant financial losses. By leveraging insurance policies and digital tools, franchise owners can create robust continuation plans. Best practices include regular communication of your plan to both your franchisor and heirs to ensure a smooth transition.
Engaging in generational financial planning conversations can help align heirs' interests with business continuity goals. Ensuring all essential documents like wills, franchise agreements, and MOIs are well understood and updated is crucial.
To ensure successors are prepared to manage the franchise effectively, they must possess the necessary skills. This preparation involves upskilling heirs or potential purchasers before any transition occurs. Conversations between the current business owner and potential successors are crucial for understanding the need for skills and ensuring financial stability. In cases of key personnel loss due to death, disability, or severe illness, it is prudent to ensure that the business can financially absorb the loss by having key person insurance in place.
Securing Your Franchise Legacy
Protecting your franchise business requires proactive planning and strategic risk management.
Faeeza Khan, Senior Legal Market Specialist at Liberty, says, “When considering business continuation planning as a franchise business owner, it is important to ensure that all of the important documents talk to one another. Any discrepancies between your Last Will and Testament/MOI/Franchise Agreement and any other business contracts, would need to be ironed out.”
To achieve this, the expertise of your company or contracts lawyers together with the financial planning solutions of your Liberty financial adviser will work hand in hand with achieving your goals.
At Standard Bank, together with Liberty, we offer the expertise and solutions to ensure your business's continuity and success. For more information on securing your franchise’s future, contact us at [email protected]