Creating an Effective Franchise Exit Strategy

A franchise exit strategy can mean the difference between a profitable sale and a gloomy demise. Exiting too early or too late could mean that your franchise may not survive a transition.

It might seem counterintuitive to plan for the end before you even make a beginning, but a franchise exit strategy can mean the difference between a profitable sale and a gloomy demise. Exiting too early or too late could mean that your franchise may not survive a transition, yet most franchisees lack an exit plan. Your business is an investment like any other, and if you time your transition well, you might turn enough profits to move to that little blue cottage by the sea. Sell too early or too late, however, and you’ll lose the strength of your negotiating position.

Choosing Your Exit Goal

You can’t hit the bull’s eye unless you aim for it, so it’s important to understand your exit goals. Some franchisees are looking for tidy profits and clean breaks, while others are building a more active retirement. Some hope to keep their returns within their families, and some prefer to achieve liquidity. Giving up your controlling hand isn’t your only option. It might make better financial sense to become a minority owner or advisor. To complicate the matter further, no exit plan is without tax consequences, so you’ll also need to crunch your numbers years ahead of your resale.

franchise exit strategy

If your goal is liquidity, you’ll also have to decide who governs your transition. A broker or reseller might draw more returns than you can manage on your own. Selling to a private equity group or obtaining the services of an investment bank lets you hold onto some equity of your franchise’s future growth—the perfect option for retirees looking to reduce their work hours rather than annihilate them. Private equity groups tend to limit themselves to sales of more than $3 million, but if you’re a multi-unit owner looking for better work/life balance, they’re often the simplest franchise exit strategy.

Family transition allows for nuanced tax planning, but if you prefer a fuss-free exit, an experienced franchise reseller or broker will simplify the resale process. Your sales channel can raise your asking price by as much as 70%, so it’s one of the most important facets of your franchise exit strategy.  

Timing the Exit

Your franchise exit needs to be timed with the utmost precision, just like any stock or bond sale. Fudge your preparations, and you may race right past your golden moment, headlong into a financial loss. It can take years to transition ownership, so you should have a clear picture of your exit requirements before you even sign your franchise agreement.

Selling a franchise is no easy matter. You’ll need to untangle yourself from your franchise agreement, value your business, and evade the landmines in your Franchise Disclosure Document. Your franchise agreement is the map of your exit strategy. It tells you:

  • What qualifications new franchisees must meet.

  • Which defaults must be cleared before you release your business.

  • Which rights you’re required to waive (including potential lawsuits).

  • The fees and payments entailed in a transfer.

  • Whether the franchisor has the right of first refusal to buy back your franchise.

  • Your post-termination obligations.

  • Whether your earnings disclaimer and item 20 renewal rates can help you transition early.

Working for Profits

Your resale is where you finally get to enjoy the fruits of your hard work, and your succession plan needs to be timed to lock in those profits. Every franchise niche peaks on its own schedule, so you’ll need to be aware of your timeline far in advance. Your window of opportunity might be narrow, but if you strike when the market is hot, you could double or even triple your returns.