The stories concerning Kumon instructors reaching senior years or simply wanting to withdraw from their business or retire are mounting. Successful business succession negotiations are rare.
Cynthia (not the real name) has been an instructor for many years. She has had two centers and her student enrollment is respectable. Her hard work of so many years at Kumon finally pays off. But those who have known her and seen her at work are witness to the incredible long hours she kept.
Following guidelines provided to those wishing to withdraw from their centres, she informed the company of her plans to retire and solicited their assistance. The Franchise Recruitment and Development Department got in gear and was helpful in alerting prospective franchisees of the opportunity.
Who could be the prospective buyer?
Business succession planning identifies those likely to takeover an existing business. High on the list are those
· Already working in the business, such as employees and managers
· Grown up family members willing to take over
· Competitors across the street
· Someone familiar with the business
In the case of Cynthia, she had someone in her employ that worked with her for two years and who responded to marketing campaign for new franchisees. Becoming aware of this, Cynthia conducted negotiations with Susan (not her real name). Cynthia disclosed sensitive financial information. However, lacking in business planning and succession techniques, she had difficulty valuating her networth (equity) in her centre. She then spent substantial amount in accounting and legal fees to come up with figures and a sales contract since she obtained from Susan a “memorandum of understanding” about the purchase.
Unknown to her, Susan was also being wooed by the local branch office as an ideal new franchisee.
Conflict of interest?
Susan rescinded her commitment to Cynthia. Instead, she obtained a new franchisee contract and was awarded takeover of a small center with few students.
The sale of Cynthia’s centre fell through and within a few months, lost several students to Susan’s new centre which is not too far away from Cynthia’s centre.
While this is certainly a matter of conflict of interest, accountability for such grievous consequences without neither recourse nor restitution for Cynthia’s legal expenses goes beyond the Franchise Recruitment and Development Department’s responsibility. Neither could fault be pointed at the K Branch Department Manager who must have known all along what was going on. They are just doing what is mandated in their contract of employment. They are just doing their jobs. Do this or else!
Did Susan get a “Good Deal”?
Perhaps this is where the phrase, “Caveat emptor” applies – Latin for “Let the buyer beware”.
In the previous post – Planning for Success – How much to invest in a Kumon center – the article discusses the value of Business Planning and how to assess someone’s equity in a business.
The case of Susan and Cynthia is a classic example of opportunities lost. Cynthia lost a buyer; Susan lost a great opportunity.
Value of Equity – primary consideration
Susan, in signing a new contract and thinking that she is getting a gift, may have forfeited a great opportunity for the following reasons:
· Cynthia’s work at her centre has reached and surpass “critical mass”
· Cynthia has earned substantial goodwill over the years
· The cost of the purchase is likely to be much less than the true equity of the center
· Center operations are established
What is “critical mass”? It is a sociodynamic term to describe the existence of sufficient momentum in a social system such that the momentum becomes self-sustaining and fuels further growth – Wikipedia.
It is a point in time when the centre’s enrollment reaches a point when current enrollment momentum is achieved enough to sustain or increase numbers. Thus, with continuing care and efficient operating procedures, enrollment figures are bound to increase. The “successful centre’s goodwill” is also apt to generate further momentum.
Because of presently poor or defective corporate strategies borne out of a highly protective sense of ownership, successful centre equities are undervalued. Successful centres are bound to be offered for sale to successors at prices considerably lower than their real market value in a less restrictive franchise contract agreement.
Cynthia’s hard work is fait accompli
Instructors of Kumon centres with average or below average number of students are investing incredible amount of their time sacrificing amenities like “paid holidays” or “long weekends” or “time with family” to build a business.
Cynthia has paid for all that. Susan, thinking she got a good deal, is faced with that uphill climb up a steep mountain. She may not even reach the crest.
Now tell me, which is better, buying into a new franchise agreement, or taking over a successful centre?