Planning a Franchise Escape
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Q: What happens if I don't like being a franchisee? How locked up am I?
A: Sometimes the choices we make don't work out as we expected. The franchise you chose may be very profitable, but:
- The hours are very long, and you rarely get home before the children are asleep. You're just plain burned out.
- You thought the business was going to automatically attract customers, but now find you need to cold call.
- You didn't expect the problems you found in hiring and retaining good employees.
- The franchisor doesn't understand your market is different from all their other franchised locations, and they won't let you make the changes you want to make.
- You thought you had the entire market to yourself, and now the franchisor is talking about selling more franchises in your area.
- You resent paying the franchisor a percentage of your gross sales, because you don't think you're getting valuable service from the franchisor.
Or maybe your franchise just isn't making any money, and you don't think it ever will. Whatever your reasons, you usually have options when the end comes.
But before you make that final decision to exit the system, are you sure your problems can't be corrected? After all, you invested a lot of time and money developing the business. Have you discussed your problems with your franchisor? Have you spoken to any other franchisees to see if they had the same problem and what solutions they used? Maybe a solution can be found when you all speak to the franchisor together.
Too often, though, the first person franchisees speak with is an attorney, and before they know it, they're involved in an unnecessary lawsuit. Remember what Ambrose Bierce said: "Litigation is a machine in which you go into it as a pig and come out of it as a sausage." There are rarely any real winners in litigation--except the lawyers. Discuss your concerns with your franchisor and other franchisees before you speak with your lawyer. There's always time for you to bring in the legal help later on if you really need it.
Even if you're losing money on the business, don't just lock the door and walk away. That's a waste of whatever equity you have built up--whether real equity or just sweat equity. If you close the door and try to disappear, you'll likely still have liabilities to the bank on your financing, your landlord on the lease, financing companies on the equipment and possibly even your franchisor.
Most franchise agreements allow you to sell your business and transfer your franchise agreement to a new owner, provided the new owner meets the franchisor's requirements. Review your agreement with your attorney to see what your rights are. Most agreements require new franchisees (if they don't already own other franchised locations) to attend training, and either you or they will likely be charged a transfer fee.
Depending on your contract, new franchisees may need to sign a new franchise agreement, with terms different from your agreement. Sometimes, the terms of the new form of agreement can dramatically affect the value of your business. For instance, the monthly royalty rate may have gone up or the franchisor may no longer be offering protected territories. You need to carefully review the terms of your contract.
Your franchisor may also have the right to purchase your business at the same price you accepted from another buyer. They have what's called a "right of first refusal." Check with your franchisor before you put your business on the market. If they aren't interested, get them to waive their right before you market the business--and get the waiver in writing. Some buyers don't want to even begin the process of buying a business if the franchisor can simply match their offer. Buying a business can be an expensive and time-consuming process, and rights of first refusal are sometimes a barrier to making a sale.
The value of your business depends on a lot of other factors, including the amount of time you have left on your agreement. To get an idea of the value, discuss with your franchisor and other franchisees what similar franchises have been selling for. You can also hire an independent appraiser to provide you with comparables in your marketplace.
Many people place their business with a business broker. Before you do, ask your franchisor whether they can help you market your franchise to others in the system. Selling your franchise to an existing franchisee or back to the franchisor may be the fastest way to sell your business. If you do use a broker, make sure he or she has dealt with franchises before. Legal requirements have to be met when you sell a franchise, and your broker must understand these requirements.
Finally, when you bought your franchise, you may have noticed a section in the back of the agreement that deal with what rights or obligations you have when you leave the franchise system. Those "post term covenants" may have an impact on your future plans. Read them carefully and, if you have any questions, discuss them with your attorney and your franchisor.
Selling a franchise is more complicated than selling an independent business. Make sure you understand your rights and your obligations before you begin the selling process.
Michael H. Seid, founder and managing director of franchise advisory firm Michael H. Seid & Associates, has more than 20 years' experience as a senior operations and financial executive and a consultant for franchise, retail, restaurant and service companies. He is co-author of the bookFranchising for Dummiesand a former member of the International Franchise Association's Board of Directors and Executive Committee.
Kay Marie Ainsley, managing director of Michael H. Seid & Associates, consults with companies on the appropriateness of franchising; assists franchisors with systems, manuals and training programs; and is a frequent speaker and author of numerous articles on franchising.
The opinions expressed in this column are those of the author, not of Entrepreneur.com. All answers are intended to be general in nature, without regard to specific geographical areas or circumstances, and should only be relied upon after consulting an appropriate expert, such as an attorney or accountant.