A franchise is a business; therefore, it is important for every business owner to have an exit strategy for his franchise. Every year hundreds of successful franchises are sold providing a continuing marketplace of business opportunities.
“Enter the arena with your exit route in mind. The most successful franchisees are people that went into franchising with a game plan. Have clear goals, and then get out when they are achieved.” - Garry Nelson, Kall Kwik franchisee
Although buying a franchise is a less risky way into business than starting one from scratch, there's no such thing as a 100% Sure Thing. It will therefore be reassuring to know that there's a way out if it doesn't work out.
There are various reasons why you need to sell up and move on. It could be failing to hit projected profits. It could be quite the opposite - if you've achieved your goals and want to try your hand at something else. Or it could be a change in personal circumstances, such as illness or the birth of children.
Exit restrictions
You must be aware that there are could be restrictions if you want to remain in the same industry after selling up. Euan Fraser, Principal and Managing Consultant at franchising advisers AMO Consulting says:
“Franchises are likely to have a restrictive covenant, which permits the franchisor to protect itself from a franchisee using his intellectual property to set up a competing business.
“The restriction will typically last for six months and will cover the franchisee’s territory and that of any other franchisee in the network.”
Conditions for exiting the business are usually laid out in the franchise agreement, the contract you sign at the outset.
Value trajectory
Are franchises like cars? Do they devalue rapidly and end up worthless, with little resale value? Or are they like bricks and mortar: their value fluctuates over time, but they have an intrinsic value, which, unlike other commodities, is unaffected by changing fashions?
The answer is that neither analogy works perfectly – but if it is a good franchise, the projections for your franchise value should be more stable, like property.
By buying an established brand you have more chance of being successful and there is a greater likelihood of a good resale value a few years down the line.
Of course, fashions and tastes change, which can affect value, and you're fairly impotent if a brand falls out of favour. And you can be powerless if a brand falls out of favour.
However, the judgement and marketing punch of an experienced franchisor has a good chance of safeguarding the business, and therefore its value, in the long term.
Areas that impact on the value of your business include:
- Projected profits and cash flow (future earnings are the most common way of evaluating a business)
- Size of your client base;
- The size of your asset base;
- the condition of your premises;
- The adequacy and condition of your equipment;
- the skill, experience and reliability of your staff; and
- The size of fixed overheads such as rent and equipment.
“Brand recognition, growth potential and profitability,” says Euan Fraser, are the main drivers of a business’ value. “It’s the same for all businesses.”
Confidentiality
It is wise to keep your exit plans under wraps so you do not upset staff or customers. However, Euan Fraser thinks that there is such as thing as too discrete.
“There’s a balance between keeping it quiet and letting the market know the business is for sale,” he says.
“Each situation needs to be handled differently; your most likely purchaser could be a customer or staff member.”
If you do earmark a member of staff as a potential buyer, then you know they have a thorough knowledge of the business. Hopefully, because this will mean they need to do less research, the selling process will move along quicker, with fewer hitches.
Harvesting your investment
You should, from the outset, have a rough idea of how long you expect to be running the franchsie for and how much value you expect it to accrue.
“You should ask your franchisor what you can expect in terms of profitability in 10 years’ time,” says Garry Nelson, a Kall Kwik franchisee. “That puts them on the spot. If they can’t tell you, then it shows they haven’t got the experience and historical data to help.”
“At the end of the day, you don’t buy one these things to hand this over to family – it’s not like that. It’s not a family business; in a sense you are renting a company for a period of time.”
No matter how much you enjoy running your franchise, you should be able to envisage letting go and enjoying the fruits of your labour at some point. Garry certainly will be.
“I’m selling a Kall Kwik centre at the moment to realise some capital – and enjoy the spoils that I have worked for,” he says.
This article was written with the help of Manzoor G. K. Ishani, MA, FCILS, FRSA, FInstCPD, FSALS Solicitor
© Manzoor G. K. Ishani. All rights reserved. (Revised) September 2006
About Manzoor
Manzoor Ishani is a Senior Consultant Solicitor with Sherrards (Solicitors) a commercial practice advising franchisors and franchisees in the UK and internationally. A specialist in franchising for more than 25 years, he is a former member of the Legal Committee of the British Franchise Association and co-author of 'Franchising in the UK', 'Franchising in Europe' and 'Franchising in Canada'.
