Securing Your Franchise

Finance Articles

In today’s uncertain climate, safeguarding your franchise’s future is paramount. Recent years have presented franchisees with unprecedented challenges, from the COVID-19 pandemic and staffing shortages to owner loss and property damage. These events underscore the critical need for planning to protect both your business and your family. Standard Bank’s Franchise team understands these unique challenges and offers comprehensive solutions to mitigate risks and secure your franchise’s long-term success.

“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 stresses the importance of understanding the necessary documentation, which becomes critical when making decisions about the business’s future, especially in worst-case scenarios. “It’s crucial to have clear agreements in place for different ownership structures,” he explains, “whether it’s a multi-owner partnership, a key person within the business, or a sole proprietorship.”

“It’s essential to understand your franchise agreement and ensure it aligns with your business insurance,” Beck adds. “Equally important are clear instructions to creditors, suppliers, and banks outlining the business’s insurance coverage.”

With these challenges in mind, Standard Bank’s Franchising team 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

Standard Bank’s trusted partner, Liberty, offers holistic financial planning solutions, including business protection, personal financial planning, wealth creation, estate planning, employee benefits, and short-term insurance. Expert legal advice ensures your business is comprehensively protected.

Business Continuation Risks

A significant risk for franchise owners is business continuity. The unexpected death or disability of an owner can create substantial uncertainty, impacting both surviving partners and the deceased’s heirs. A buy-and-sell agreement funded by life insurance offers a practical solution. This agreement ensures a smooth transfer of ownership and provide financial stability for everyone involved.

Effective business continuity planning requires balancing the interests of surviving shareholders with those of the deceased’s heir. This ensures the business can continue operating while protecting the estates financial interests.

Identifying the future owner – whether a surviving partner, a third party, or an heir – is crucial. Contracts must be in place, wills updated, and funding secured, typically through life insurance, to facilitate the purchase of the deceased owner’s shares.

Surety Risks

Another key risk is surety risk, stemming from suretyship agreements and outstanding debts. The death or disability of a surety can significantly disrupt business continuity. Contingent liability insurance provides a financial safety net, ensuring debts are settled and credit lines remain open. This protection also safeguards the surety’s estate, mitigating potential liabilities.

Keyman Insurance

The loss of a key person essential to the business’s profitability can also severely disrupt operations. Keyman insurance provides funds to sustain the business, recruit and train a replacement, and minimize disruption, ensuring continued profitability.

Importance of a Well-Structured Estate Plan

A well-structured estate plan and a valid will are essential for business continuity. Without these, the business could face protracted legal battles, liquidity problems, and potential collapse. Estate planning ensures a smooth transition, preserving the business’s value and operations. Key considerations include clearly defining future leadership within your estate plan and ensuring alignment between your buy-and-sell agreement, will, and memorandum of incorporation (MOI) for a seamless transfer of ownership.

Franchise Agreement Considerations

Franchise agreements often contain clauses that can threaten business continuity, such as joint liability for debts or the need for franchisor approval for ownership transfers. Careful contract negotiation and comprehensive estate planning, supported by robust insurance solutions, can mitigate these risks.

Succession Planning

Succession planning is crucial for maintaining brand integrity and operational consistency, ensuring your franchise thrives even after ownership changes. Failure to integrate estate planning with business continuity strategies can result in significant financial losses. By leveraging insurance policies and digital tools, franchise owners can create robust continuity plans. Regularly communicating your plan to both your franchisor and heirs is essential for a smooth transition.

Openly discussing generational financial planning can help align heirs’ interests with business continuity goals. Ensuring everyone understands and keeps key documents like wills, franchise agreements, and MOIs up-to-date is also vital.

Preparing successors for effective franchise management requires equipping them with the necessary skills. This involves upskilling heirs or potential buyers before any transition. Conversations between current owners and potential successors are crucial to assess skill needs and ensure financial stability. Key person insurance is a prudent measure to protect the business financially in case of a key individual’s death, disability, or critical illness.