Getting Out of a Franchise Business
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Recently, I received the following letter from a reader:
"A few years ago, I signed up [with] a fairly well-established franchise that offers a service business to its customers. I actually enjoy doing the work, and I feel I'm pretty good at it. However, I'm having trouble with the marketing aspect of the business. I'm following the franchise program to the letter, but I find it difficult to get referral sources to take the time to talk to me. I really would like to get out of the franchise agreement while keeping most of my posterior intact. Any ideas?"
Generally, franchised businesses fail less often than their stand-alone mom-and-pop competitors, because the business model has usually been tested successfully in a large number of places before you buy into the program. So whenever a franchised business fails, there are three possible reasons. Either (1) you weren't the right person to build the business, (2) your franchise territory is not one where the franchise concept is likely to be successful (for example, frozen smoothie franchises are more likely to succeed in hot climates than in cold), or (3) the franchise concept is fundamentally flawed and not even Bill Gates could make money by following the franchise model. Since you say this franchise is "fairly well established", we can rule out the third possibility.
Whenever I see an e-mail message like this one, I'm reminded of that old TV ad for the "Roach Motel" insect trap: "Roaches get in, but they don't get out again." Franchises can be a lot like Roach Motels in that regard-once you've signed on the dotted line, you normally don't have the right to terminate the relationship if it doesn't work out (even though the franchise can terminate you if you do something bad). You're stuck for the full franchise term, which is usually 10 to 20 years.
If you had only recently (say, within the last 6 to 9 months) bought into the franchise, I'd suggest you talk frankly to the franchise people about the problems you've had and tell them you want out. Even though they're not required to, a decent franchise will let you out of your agreement and refund most of your upfront franchise fee within a short time after you signed up, especially in a case like this where you've energetically followed the program and "given it your all."
In this case, however, you've owned the franchise for a few years. The franchise is likely to feel they've earned their fee, and they probably won't let you out of the agreement at this point.
That leaves you with just one option-selling your franchise to someone else, with the franchise's permission. Look at the "assignment and transfer" provision in your franchise agreement to find out how. There are likely to be conditions, such as these:
- Either you or your transferee will have to pay a "transfer fee" to the franchise-this is usually one-third to one-quarter of your initial franchise fee, but it may be more.
- The transferee will have to be acceptable to the franchise and will be required to undergo franchise training and sign a new franchise agreement before the franchise will approve the transfer.
- Once the transfer is approved, you'll be required to sign a noncompete agreement that will prohibit you from competing with your old business (and any other franchise location) for a period of two to three years-this means you'll have to get out of the business altogether for a while, even though you "enjoy doing the work" and might like to continue doing it.
Where can you find someone to buy your franchise? Business brokers are a good place to start-check out the Web site of the International Business Brokers Associationto find a qualified broker near you. The area representative for your franchise may also know of people who have expressed interest in buying a franchise in your area.
There are also franchise brokers that hook people up with franchise opportunities. The best known franchise broker organizations are The Franchise Network, FranChoiceand The Entrepreneur's Source. But beware: If a franchise broker is working with your franchise to help them find new franchisees, they may consider it a conflict of interest to help you sell your franchise location at the same time.
Finding a buyer for your franchise is going to be tough, because your business frankly has not been successful. You may be able to find someone willing to give it a chance, but don't expect to recoup your losses. If a buyer is willing to assume your lease, pay the transfer fee to the franchise and pay you a few thousand dollars over that, do the deal and get on with your life.
Cliff Ennico is host of the PBS TV series MoneyHuntand a leading expert on managing growing companies. His advice for small businesses regularly appears on the "Protecting Your Business" channel on Small Business Television Network. E-mail him at firstname.lastname@example.org. This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. Copyright 2003 Clifford R. Ennico. Distributed by Creators Syndicate Inc.