Importance of Having an Exit Plan Before You Buy a Franchise

By Robert Steinberger

Congratulations. You just bought a franchise. And while running a franchise might be the perfect fit for you right now, one day you may need a franchise exit plan so you can leave the business to pursue other passions, retire, travel, or start a new business endeavor.

No matter how enthusiastic you are about your upcoming franchise purchase, before signing on the dotted line, evaluate it in terms of your ability to exit when you need to move on.

1. Selling your franchise: The ideal exit

Every business owner should plan to exit their business by selling it, and that applies to franchisees as well. This is your opportunity to capitalize on all of the goodwill and clientele you have built up within your community. Building up equity in a community doesn't happen overnight; typically franchises take three to five years to recuperate the initial investment.

Item 17 of the Franchise Disclosure Document (FDD) outlines the rules and limitations around renewals, terminations, transfers, and dispute resolutions. Also included are different challenges or expenses to expect when selling. Reaching out to previous franchise owners who have sold their business will also give you insight to how the parent company managed the transaction. Find out if they provided support in selling and how accepting they were of prospective buyers.

Things to be aware of: Look for limitations or fees on your ability to sell your franchise. Standard transfer fees are around $5,000 or 25% of the sale; some franchisors mandate 20 to 30% of the initial investment, while others far surpass that. Make sure that selling your franchise will be feasible. You want the opportunity to earn a profit.

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2. Terminating the agreement/closing shop

What happens if you hemorrhage funds each month or are unable to build a sustainable clientele? While franchises tend to have a higher rate of success than independent businesses, franchises close every day. Terminating a franchise and walking away can be a very intensive and messy process.

Prospective franchisees should ask about supportive services or flexibility in renegotiating territories; see what support the parent company offers to help struggling franchisees recover. That would be better than terminating the agreement.

Item 3 of the FDD lists all of the legal disputes of the franchise for the last 10 years. Determine if any of the cases revolved around franchisees leaving their franchises without buyers. Identify what support services were provided by the franchisor prior to that point and how the litigation was resolved. Pay close attention to what fees were paid where, and what happened to the leases and insurances.

Things to be aware of: If you close shop, you will not get your initial investment back. It’s also very likely you will owe the franchisor a substantial fee to cover royalties and fees that were due during that period you were open. Some franchisees are able to negotiate an exit by:

• Giving the keys back
• Paying owed money
• Releasing the parent company from liability
• Agreeing to not sue the franchisor
• Returning operating manuals and company materials

Others have taken the franchisor to court. The success of this model depends on the validity of the franchisee’s claims, such as the parent company's failure to provide promised support.

3. Death or disability

While your health may be excellent, you need to consider what will happen to your family and the business in the event that something happens to you. Grim to think about, it is crucial to consider when signing into such a large financial and binding commitment.

In the event of death or disability, the two best options for the franchisee are selling the franchise to a third party, giving the parent company the first right for refusal, or authorizing a surviving spouse or adult child to operate the franchise.

Ensure there is a death/disability clause in your franchise agreement, as well as having an updated will outlining your wishes.

Things to be aware of: Some franchise companies enact a mandatory termination in the event of death or permanent disability. This leaves you and your family at a disadvantage. Without the ability to sell the franchise or receive back the initial investment, this option will most likely leave your family financially unstable.

Other franchise companies have a mandatory sale of the assets back to the parent company at a predetermined valuation method. While better than a straight termination, the best options will leave your family with a larger stake of the initial investment.

Plan your exit plan before buying a franchise

With any extensive business transaction, you should always be evaluating and preparing for an exit strategy, mainly because you never know what tomorrow holds. This is many times overlooked when individuals purchase a franchise, but by preparing for and planning an exit strategy, you will be better equipped in case circumstances change.

RELATED: Buying a Franchise vs. an Independent Business: What Are the Pros and Cons?