The Role of an Exit Plan as a Franchisee

September 22, 2015

Going through the purchasing phase of a franchise spikes the adrenaline and fills your mind with endless optimism. That’s great! You should be energized by your new endeavor.

But let’s pause here for a moment. Do you plan to retire from this job? What are your long-term goals? Do you plan on pursuing other opportunities?

No matter how enthusiastic you are today, the reality is that you will not run this business forever. At a minimum I hope you have an exciting retirement planned. For others, they will build this business up and move on.

Before you close on your new franchise, you need to explore three different exit options and understand the Franchisor’s stance on each of them in the Franchise Disclosure Document (FDD). 

1) Selling

Welcome to your ideal exit. Selling capitalizes on all the efforts you put into the business. Typically a franchise takes several years to recuperate the initial investment. Most franchisees won’t look at selling their shop prior to that happening or several years after. During that time, hopefully you enjoyed a profitable and thriving business. 

This means you have:

  • Built goodwill in the community;
  • Established your location;
  • Been known for a high quality of service.

By selling the franchise, you capitalize on all of that plus recover the majority of your initial investment.

Keep in mind through, each franchisor executes varying limitations when it comes to the sale of one of their franchise outlets. You can find these outlined in item 17 of the FDD. This covers rules and limitations around renewals, terminations, transfers, and dispute resolutions.

You will also be able to get an idea about expenses to anticipate when transferring the franchise to another individual. Standard fees are typically $5,000 or 25% of the then current franchise fee.

It would be wise to reach out to previous operators who sold to understand any pushback or challenges they experienced from the parent company. Ultimately you want to ensure you have the ability to make a profit when you sell. 

2) Closing & Terminating the Agreement

Not every franchise enjoys a fairy tale ending. Despite every effort on the franchisee’s part, some franchises don’t make it. It could come down to the location, target market or economic conditions.

Walking away from a franchise will not be easy.

Whatever the factors, be aware that your franchise might not be successful due to influences outside your control. Due diligence here includes discussing options or flexibility when it comes to renegotiating territories. Know what type of support the parent company offers to struggling franchises and how other former franchisees exited in this manner.

During the initial phase, a franchisor works to woo you, downplaying the negatives about their company. Item 3 of the FDD documents ten years worth of legal disputes. Scour this section to uncover cases where the franchisee walked away without a buyer. 

You’ll want to know:

  • What services were provided prior to termination?
  • How the litigation was resolved?
  • What fees were paid and where?
  • What happened to leases and insurances?

When you close a franchise through this method, you lose the initial investment. There is also the possibility that you will owe the parent company additional fees. I’ve seen some franchisees negotiate a termination through turning the location over and paying outstanding fees. It all depends on the circumstances and the leniency of the franchisor.

3) Death or Disability

Most business owners, not solely franchisees, fail to plan for death or disability. This occurrence not only devastates the family emotionally, with a franchise it can also leave lasting financial implications. 

Make sure there is a death/disability clause upfront. Additionally, you will need to update your will outlining instructions for the franchise specifically.

There are two main options to consider for this particular clause:

  • Ability to sell the business to a third party*;
  • Having a spouse or grown child take over the franchise.

*It’s customary to give the franchisor has a first right of refusal. 

Working Towards a Profitable Franchise Experience

I regularly work with prospective franchisees in the final stages of securing their franchise. I help clients navigate through options for exiting, as well as other crucial due diligence.

Working through the FDD will be unlike any other contract you have ever encountered. The complex and dense legalese can be overwhelming. Add in all the financial reporting and you may feel as if you are staring at gibberish.

With such a crucial and substantial investment, make sure you have the right advisors to help you on your path. This heightens your ability to make a profitable decision and set yourself up for long-term success.

To see how a franchise lawyer can help you, contact me today.