As Baby Boomer Restaurant Owners Retire with No Plans for Millennial Children to Take Over, Restaurant Brokerage CEO Sees Uptick

As World War II ended, soldiers returned fresh from battle to reaffirm their legacy in creating the largest generation America has ever known. It led to significant birth rates and a “boom” in the population giving rise to the nickname, “Baby Boomers.”

That generation has influenced society in multiple ways, from driving consumer demand for housing, automobiles, and consumer products to creating a need for schools, libraries, and public spaces. The sheer scale of the generation, (76 million births between 1946 and 1964), amplified its impact on society. Baby Boomers also created the highest net worth of any generation, based on the U.S. Federal Reserve estimates, including $7.4 Trillion dollars in private businesses. Early adopters of the franchise model;  many of these private businesses are franchise restaurant businesses.

 

Baby Boomers gave birth to the generation known as Millennials. Unlike their parents, their share of small business holdings is just $1.62 Trillion, a sign that this age group is either unwilling or uninterested in taking over the family business. Millennials have focused on education over business and are often cited as the most educated generation. An article by First American Data found that, “Approximately 38 percent of millennials have a bachelor’s degree or higher, compared with 32 percent of Generation X and 15 percent of baby boomers when they were the same age.”

 

Now that aging boomers are ready to retire and cash out, Millennial children are not stepping up to take over. The first Baby Boomers, those born between 1946 and 1964, began to turn 65 roughly a decade ago. According to the latest census data, approximately10,000 Baby Boomers will hit retirement age every single day between now and 2030.Writers have coined the phrase, the “Silver Tsunami” to capture the effect that will once again, be wielded by this large swath of society.

 

This leads to a wealthy generation of restaurant franchise owners without an exit strategy. Baby Boomers want and need answers on how to create a liquidity event to convert their valuable assets into cash and fund their retirement years. Restaurant franchise brands may be particularly vulnerable to this impact than other types of franchises. Despite improvements to the business model and increased technology, restaurant ownership is still a “hands on” business, requiring day-to-day operations. It appears the educated Millennial generation is not interested.

 

For legacy brands, the impact may be greater than for newer brands. The iconic brands, trusted and favored among Baby Boomers, do not offer the benefit a Millennial may seek. Rather than an emphasis on profits, Millennials are focused on “values.” This generation is guided by “meaningful motivation,” indicating they may prefer the new unproven smoothie brand with a mission to plant trees with every sale over the legacy location catering to the customer’s craving for fast food, despite its earnings model.

 

For restaurant franchisors, this signals their own form of Tsunami if they are not prepared for this trend. Many Baby Boomers are well funded and may not need to convert that asset to cash. That could lead to significant doors going dark and net restaurant growth heading into negative territory. Prime locations could be ceded to competitors as leases lapse and validation for new franchisees will be hindered by closing doors.

 

Recommendations for Franchisors 

 

• Franchisors should be assessing their franchisee portfolio. Understand the age and risk of owners and prioritize outreach to Baby Boomers, particularly for stores reaching the end of their renewal term. Those doors are at jeopardy.

 

• Executive teams must look at their cost of acquisition and time to build. Compare this to the loss of royalties for closing doors. The cost and time to attract new franchisees, build stores and get them to significant volume can translate to significant hits to the royalty stream over existing locations generating revenue. It is nearly impossible to build new stores and get them to revenue levels to offset the royalty loss of existing doors. This simple modeling should be a part of every CEO’s report deck weekly to gauge the risk of closing doors to the brand’s royalty stream.

 

• Real estate must be analyzed. A key risk for franchisors is the loss of prime lease space. Competitors are standing by, ready to acquire these locations to convert to their concepts at much lower costs than building from scratch. Franchisors should analyze all locations and determine which doors they cannot afford to lose in each market. Many legacy locations have remaining option years at below market rates that landlords are happy to re-lease at higher pricing. Attracting new franchisees to re-open a market you lost, where a competitor now holds the prime location you surrendered, is going to be an uphill battle.

 

• Franchisors should make experts available. Exit strategies must be discussed in an open and honest way at the franchise conference, online and in training calls. Exit strategies should be part of the discussion in every meeting with Franchise Business Consultants. Franchisees are often intimidated and see any discussion of an exit strategy as a failure. It is critical to bring this topic into the open. It is a reality that doors will transfer. Ignoring the potential closures will not make it any less real.

 

• Restaurant franchisors should develop a national resource. Preferred vendors are common in the industry. You need one for referring restaurant franchisees seeking an exit strategy. In partnership, these resources can work to not only retain the existing unit, but bring new external candidates that acquire and build new units. These may not be Millennials, but they will be new and excited owners, ready to take over existing cash flow.

 

• Brands must understand the target market. Candidates for resales will not be found among most franchise brand’s existing marketing efforts. Franchise development teams deal with franchise candidates that are ready to take on new opportunities and build from scratch. Those in the market to acquire existing cash flow and take on transfers are different candidates altogether, less risk averse and not attracted by the same marketing message.

 

• Brands should look externally. Do not rely on existing franchisees and multi-unit heavy hitters to take up the slack and buy these transfer units. Why? Look at the profile of these owners in your brand. Most are from the Baby Boomer generation. Many are in the five-to-ten-year window to exit rather than acquisition mode. Secondly, there simply are not enough of them to acquire the Tsunami of units you should be anticipating.

 

Above all, franchisors should not ignore the Silver Tsunami headed their way. A plan should be in place to make this a primary focus for every franchise restaurant brand. Baby Boomers are once again, shaking up society. When it comes to restaurant franchises, you cannot outrun a Tsunami, but you can plan to avoid being swallowed by it.

 

Robin Gagnon is the Co-Founder and CEO of We Sell Restaurants, a brand that has carved an unparalleled niche in the industry as the nation’s leading and only business broker franchise focused on restaurants. Under Robin’s leadership, We Sell Restaurants has grown to 45 states where it dominates the restaurant for sale marketplace. Robin is the Chair of the Women’s Franchise Committee of IFA and is an IFA Board of Director Member. She is an MBA, CFE and CBI. Entrepreneur has named her to their list of the “Top Influential Women in Franchising.”