It may seem counterintuitive to think about your franchise exit strategy just as you’re about to buy into the business. However, it’s an essential step in your franchising journey. Many franchises require a long-term commitment, ranging from five to 10 years or even more.
What many franchisees fail to do though is think about exiting the business when the time comes and doing proper preparation for the event. In this article, we explore what is an exit strategy for businesses, especially franchise businesses, why they are important, how to exit the franchise agreement and the different types of exit strategies.
Keep reading below to discover more.
What is an exit strategy in business?
A business exit strategy is a carefully planned approach to transitioning from leaving the business and either liquidating it or passing on ownership to someone else.
In franchising, the details of such an exit strategy are often included in the franchise agreement and this requires careful attention and consideration.
Why do franchisees need an exit strategy?
So, what is the importance of an exit strategy in franchising? Firstly, you should be aware that your franchisor may restrict your transfer of ownership in several ways, depending on whether you choose to exit the business before the franchise agreement has ended.
For example, they may charge a franchise fee, they may require you to sign a non-compete agreement that prohibits you from operating within the same location or from offering the same or similar products and/or services for a period of time or they may stipulate other stringent terms for franchisee exits from their network.
However, you should be ready for this before you even sign on the dotted line of the franchise agreement. There are many reasons behind this, including possible retirement, the desire to earn a profit from the sale of your business, transferring ownership to a family member, being no longer able to run the business due to stress, burnout or an illness and many others.
Although we may not like to think of the eventualities of exiting a franchise business or what circumstances life can present us with, it is always best to be as fully prepared as possible for your exit from the business.
How do you break away from a franchise?
If you are already running a franchise business as a franchisee or you are considering purchasing a franchise, you need to know how do you get out of a franchise agreement in the UK.
The first step is to discuss your franchise exit strategy with your franchisor and be aware of their terms as stipulated in the franchise agreement. These terms will dictate how you break away from a franchise prematurely.
You should be aware that there may be fees to pay for an early termination of the agreement and other stipulations that could restrict where, how and for how much you sell your business.
This is why business exit strategy planning is so crucial and why an exit strategy business plan is often the preferred route to take as you prepare to hand over the reins of your business to a new owner.
Putting your exit strategy in writing will not only help you gain clarity about your ultimate goals and how to get there but it will also help the franchisor assist you in the sale of your business or enable you to transfer ownership to a new buyer with greater ease and simplicity. It is also an important way to help you achieve your goals.
What are the different types of franchise exit strategies?
In franchising, there are over 100 franchise industries with dozens if not hundreds of franchises operating under these industries. That’s why every franchise business will have a different exit strategy in place. However, the most common types of exit strategy include the following:
- Franchise resale: A franchise resale is when you sell your franchise business to a buyer who is interested in picking up the business where you left it off. This includes staying within the same location, serving the same customer base and other factors. Often, a franchise resale will first need to be discussed with your franchisor, who may be able to source a buyer from you. The benefits of a franchise resale for the buyer are that all the important systems and processes have been set up for them and they simply need to move in and start running the business, which is ready for them to continue where you left off.
- Sell to a family member or employee(s): Another option you have is to sell your business to a family member or to a current employee(s). Regarding selling to a family member, you need to be sure that they want to buy and that they have the right skills to run the business successfully. Not to mention the financial investment required for them to purchase the business from you. Regarding selling to a current employee or to a group of employees, the plus side is that they already know the business quite well. However, they may need financial assistance to purchase the investment from you.
- Sell to an independent third-party: Selling your franchise business to an independent third party can be difficult because research reveals that despite there being many successful businesses for sale, only around 20% of these are eventually sold. It may be difficult for you to find the right buyer by yourself and you may need the help of a consultant or a franchise sales specialist to help you. However, some opportunities such as those with the Belvoir Franchise Group, which offer fully supported resales, make this process much easier.
- Sell back to the franchisor: In some cases, you may also be able to sell your franchise business back to the franchisor. However, this is where you will need specialist help from an experienced professional regarding working out the value of your business and agreeing on the sale price.
- Closing the business: The last option you have is to consider closing the business altogether. This is a major emotional and financial decision. Liquidating a business means letting staff go, selling assets, finalising books with your accountants and bookkeepers and ensuring there is no remnant of what took you years and a lot of money to build up.
How to develop an effective exit strategy
In order to develop an effective franchise exit strategy, there are a few key considerations you should bear in mind as you work towards the next step in your life. Here are a few worth bearing in mind:
- Know who you want to sell to: Choose the right person or organisation to sell your business to. Once you know who you’ll sell to—be it the franchisor, a new franchisee, a family member or a third-party—you’ll be able to work out the remaining details.
- Determine your sale price: Determining your franchise business’ sales price is often done by looking at the cash flow figures it produces on a regular basis. It is a common rule of thumb that you should present your buyer with at least three years of financial statements which not only indicate profit and loss but the cash flow of your business. This valuation will also include your assets and revenue, fixed and variable expenses and other factors to give you a final sales price. However, once you have a final sales price, be prepared to drop it. Many business sales do not sell for the asking price. And with a franchise exit fee that has to be paid to the franchisor in some cases, you’ll need to adjust accordingly.
- Select a date range for the sale: Instead of having a fixed date in mind for the sale of your franchise business, consider giving yourself a flexible time frame. This will take some of the pressure off finding a buyer and going through the sale negotiation process.
- Consider your post-exit involvement: Think about your role in the business after you exit. Will you make a clean break or will you stay on in a type of advisory role?
- Boost the value of your business before the sale: Make sure that you aim to boost the value of your business before the sale. For example, you may wish to make refurbishments and improvements to the business so that the new buyer has less work and changes to make when they take the helm. Also, the more value you add to your business, the higher your asking price could be. This will ultimately help you recoup your investment.
- Stick to the franchise agreement’s terms and conditions: Lastly, make sure that you carry out the sale of your franchise business in full accordance with the franchise agreement’s terms and conditions. The last thing you want is to be in breach of a clause or face legal action for failure to abide by the agreement before, during and after the sale.
Conclusion
Starting a franchise business should begin with the end in mind. As much as we don’t like to think about life’s unexpected turns, you need to be prepared for a wide range of eventualities. This is where having a solid exit strategy comes to the fore. When you have discussed your exit strategy with your franchisor before signing the franchise agreement, you will be better prepared to run the business and have a graceful way out that can also be profitable for you in the end.
And if you are currently considering franchise opportunities to buy, the Belvoir Group stands out as a leader among the rest. Joining the lucrative property industry in the UK is definitely worth betting on and you’ll not only be able to operate under a trusted and well-established brand.
You will also work with a proven business model and receive all the necessary training to set you up for success. Get in touch with us to learn more about buying one of our established property franchises and never look back as you embark on a journey to business ownership like no other.
