Before you buy a franchise, consider how to say goodbye to it
When you take a road trip, it’s always good to have an exit strategy. Just in case roads are closed, the weather turns, or you become hungry or ill. On your journey as a franchisee, it’s a mistake not to have an exit plan. Just in case.
Why do franchises need an exit strategy?
Life as an entrepreneur and business owner is never plain sailing all the time. There will be bumps in the road.
Some of these may be unforeseen. You’ll need emergency planning for these (something that many businesses have become much better at doing during the 2020 COVID-19 pandemic).
Other hurdles are known, and you should plan for these. Retirement is, perhaps, the most common.
Other reasons for exiting your business include:
To take advantage of new opportunities
Because of personal issues (for example, the need to look after an ill spouse)
Disability or illness
Would you really start a road trip with no plan of what to do when you come to the natural end of your adventure, or what to do if an emergency arises? Yet, according to the UBS 2018 Q1 Investor Watch Report, almost half of business owners have no formal exit strategy.
What do you want to do with your business when the time comes?
It sounds counterintuitive to start thinking about how to exit your business before you have even started. But take a second to think of the alternative.
Many years along the road you decide it is time to retire. You’ve built your business up, and the people you employ rely upon you for their livelihoods. It’s successful, and makes a nice profit each year. But it’s time for you to move on. Spend more time with your family. Explore the world. You just let your business go. But how?
The UBS report found that preferred exit strategies are:
Sell the business (52%)
Leave it to family (20%)
Close the business (18%)
If you’re in that second category, here’s a word of warning: when asked, 80% of family members said they didn’t want the business but would rather have the money.
How do you develop a franchise exit strategy?
Before you buy a franchise, you will have ensured that running a franchise business is right for you. You’ll have analyzed things such as:
Your personality and skillset
The financial side of being a franchisee
The support you will receive
The commitment you’ll need to make
You should have taken a franchisee aptitude test, and made certain that life as a franchisee is for you by speaking with an experienced franchise consultant. You’re good to go. Except you haven’t considered your exit planning.
Here’s what you should do:
Set your exit goal
Do you want to sell the business? If so, who to?
Perhaps you are hoping to transition the business to a family member. You’ll need to sound them out, and make sure this is what they want, too.
There is plenty to consider here. For example, if your preferred exit is to sell to your current employees, in a kind of management buyout, will they have the money to purchase the business from you?
Perhaps you don’t want to sell the business, but instead have it run for you, by your management team. You’ll need to consider how to train them to lead people and manage the business.
When do you want to exit the franchise?
Having established your preferred mode of exit, you now need to consider timing. You’ll need to think about when you want to sever ties, and allow for time to put your exit strategy into motion. For example, if your preferred exit is to sell you should consider how long it may take to sell the business.
Therefore, when deciding upon your exit strategy, it is best to consider time of exit as a date range rather than a fixed, single date or year.
Consider your post-exit involvement
When you are done, do you want to exit the business completely? Will you be happy to remain involved as an advisor (common when transitioning to family)? Are you prepared to remain in the business for a few months to help the new owner bed in?
The answers to these questions could affect your selling options, how family members feel about taking on ownership responsibility, and even the sale price of your franchise business.
Boost the value of your franchise business before exiting
Unless you decide to simply shut the doors on your business and close it down (a word about this in a moment), you’ll want to boost its value as high as possible.
You’ll need to consider what a buyer is looking for – equipment, workplace, quality employees, a good revenue stream, etc.
Should you remodel and upgrade continuously as you approach your preferred exit date?
If you’re selling to family members, should you sell at a discount, or offer a phased purchase agreement?
Be aware of limitations of sale
The franchisor may have first right of refusal to purchase the franchise from you. They may also have fees (either a flat fee or percentage of sale price) written into your franchise agreement. It is essential that you understand any such terms before you buy a franchise – they will affect your exit strategy and the amount of money you may amass from a sale of the business.
Is closing the franchise business an exit option?
What if you can’t find a buyer and your family don’t want to take on the business? Can you close it down?
Terminating your franchise agreement may not be straightforward. First, you won’t recoup any of your original investment. Second, you may have costs of closing to pay. Third, the franchisor is likely to require you to pay fees to cover royalties and commissions that you owe.
Item 3 on the Franchise Disclosure Documents will list legal disputes of the franchise during the last 10 years. This will include if any were concerned with business closure and detail fees and costs paid. Pay attention to these.
Plan your exit strategy early
Never buy a franchise without considering your end goal. The steps we’ve outline above are crucial to ensuring you make a successful investment, and that you reap the final reward of your effort and commitment.
The key is to develop your franchise exit strategy early. Of course, this won’t be carved in stone. It must be flexible, to allow for changing circumstances and markets.
Get the best advice to help you select and buy the best franchise business for you. Book a free franchise consultation today.