Franchise exit strategies – what you need to think about
At some point you will exit your franchise agreement – that is a fact. The important thing is that you know this and plan for it from the moment you take on the business.
Whether it is because you have built up the firm to a satisfactory degree and want to sell it on, or that you have spent your whole life at the helm of the business and finally want to retire – at some point the time will come when you will want all your hard work to come back to you or your family in the form of a nice big cheque.
Just like any business, a franchise is an investment; you put money in to take on a brand and its business model in a bid to make an annual profit, as well as something more when you decide to let someone else take over your carefully cultivated organisation. Your exit will happen – and it will no doubt be an emotional moment.
When you are just entering into a franchising agreement, your exit strategy will probably be far from the front of your mind, but it is actually a good idea to chat with your franchisor about what happens when you want to sell. Don’t give the impression you are going to sell immediately, but there is no harm in discussing the legal and logistical aspects of passing on your business. But why would you want to sell it on?
For some people, the decision to sell comes down to them having spent a great deal of time, money and effort on establishing their franchised business so that they could sell it on – it was an investment from the beginning. Others might decide that they want a career change and thus no longer want to manage the business.
Some less positive reasons for exiting a franchise agreement could be that the business struggles (much less likely to occur in a franchise than in a regular start-up), you have a change in circumstances such as a move to a new part of the country/world, or you may suffer an illness that leaves you unable to work.
There are steps you should take to make sure you are as prepared as possible for your exit – planning is a huge part of any successful business and planning for a sale is just one more of these crucial pieces of preparation.
What to think about
The first point to consider is what you are putting on sale – depending on what type of franchise you own, you may have lots of equipment and assets, or you could just be passing on a client list and some good advice about your area.
You should be thinking about what a buyer will look for, which might be an extensive client base, high revenues, a pristine workplace, quality staff and small overheads among other things. It is important to know where your company is in its life cycle too, as you may be able to command a higher price if you can show the potential for future turnover and profitability growth in your business.
It may be difficult to find official statistics on the sell-on value of different types of franchises, but anecdotal evidence will provide you with some idea. A crucial point is that you know who you are selling to and what they are looking for. A late-night doughnut stand (with the unsociable hours that could entail) might be a profitable and attractive proposition for an investor to take on, but not so much for a man or woman looking for a business to run.
This leads on to another significant factor – who are you selling to? Occasionally, it might be the franchisor that may buy the business off you; alternatively it could be a franchisee switching to a new industry or someone entering franchising for the first time. If you know who you are aiming to sell to, you can build the company towards what they might want.
On a logistics level, there will generally be a transfer fee to be paid to the franchisor when you exit the business and also some clauses preventing you from using intellectual property or processes for a given amount of time. There will also be due diligence required, so ensure that you have no skeletons in your fiscal wardrobe and that all your records are up to date.
The future profitability of the organisation will no doubt be a key factor for when you sell, but don’t forget to pay attention to long-term leases or rental agreements, as these could put a buyer off if they are too restrictive. It is up to you to plan the best time to sell, but having it in the back of your mind when planning for the future will ensure that the organisation is in the best shape to pass on to a new owner – and for you to get your deserved reward when you sell.