What’s the Best Way to Exit A Franchise?
Whether you’re a long-time franchise owner thinking of leaving the business or just beginning to consider buying a franchise, before you move forward, you should analyze the terms of your ability to exit a franchise with an experienced business advisor.
Plan to Exit
Some franchise owners want to pursue other interests, retire, travel, or start a new business. To do that, whether it’s to be this year or many years in the future, a franchise owner should plan to exit the business by selling. Selling the franchise gives the owner the opportunity to capitalize on all the goodwill and strong customer base built up through his or her efforts within the community.
A standard Franchise Disclosure Document (FDD) will detail (typically in Item 17) the rules and restrictions concerning renewals, terminations, transfers, and dispute resolutions. It will explain how you and the franchisor will interact and your rights in selling. The FDD will also state what each party can and can’t do after termination.
The termination clause in the FDD will detail the rights and responsibilities of each party if performance is suspended under the agreement when there is a “material breach” of contract by the other party; and terminating the agreement when there’s a material breach that hasn’t been resolved within a reasonable time after a demand for resolution has been made.
It’s smart to gain the insight and experience of a business advisor like Andrew Rogerson who has worked with numerous franchises and facilitated sales with a variety of national and international companies in many industries throughout California. Andrew will help you determine whether the franchisor will provide support in selling and how they’ve received prospective buyers.
Andrew will watch for any franchisee limitations or fees regarding your ability to sell your franchise. It’s common for transfer fees to be roughly $5,000 or 25% of the sale. Examining all the variables with Andrew will help you see if selling your franchise will be financially feasible.
Death or Disability
Although it’s not pleasant to think about, another way that you may exit your franchise is due to your death or poor health. A conscientious franchise owner will consider what will happen to his or her family and the franchise if something unfortunate occurs. This notion should be part of your preparation when entering into an agreement and also part of the exit strategy.
In the event of the death or disability of the franchise owner, one option is to sell the franchise to a third party with the parent company having the first right for refusal. Another possible alternative is to authorize that surviving spouse or an adult child continue to operate the
franchise. With this in mind, be certain that the FDD contains and that you review the death/disability clause. In addition, harmonize your estate plan to detail your instructions.
Note that some franchises have terms in their FDD that dictate mandatory termination in the event of death or permanent disability. This type of clause can leave a franchise owner and his or her family at a distinct disadvantage because after the death or disability of the franchisee, the family wouldn’t have any ability to sell the franchise or see a return on the initial investment. There are other franchises that have a mandatory sale of the assets back to the franchisor at a predetermined valuation method. This allows for some recoupment of the franchisee’s initial investment. Discuss this with Andrew to find the best way to protect your investment and your family.
Remember that terminating your franchise and walking away can be a very complex and stressful ordeal. Instead, work with Andrew to evaluate and prepare an exit strategy. This will allow you to be better equipped in the event that your business situation changes suddenly.
Don’t be afraid to ask for help, to ask questions, and be prepared. The sale of your franchise will be that much farther ahead. Andrew is very happy to help you!