Chapter 19: Franchisee Exit Strategies and Succession Planning

Operating a franchise can be a rewarding venture, but inevitably there comes a time when franchisees need to plan for their exit. Whether it’s in the form of retiring, selling the franchise or pursuing other endeavors, having a well-thought-out franchisee exit strategy is essential. This will not only help you maintain a positive relationship with the franchisor but also ensures the overall stability of the business. 

The International Franchise Association (IFA) emphasizes the benefits of a well-planned exit strategy, noting that it can be a lengthy and complex process that requires careful consideration.

“Developing a plan three or more years before exiting is wise,” the IFA noted. “Many franchisees wrongly assume this is a simple process. However, a multi-dimensional plan is required and can be complex to develop and implement.”

Prepare to Exit

To begin preparing for your exit, start by thoroughly reviewing your franchise agreement and engaging in open communication with your franchisor. Kimberly Daly, a franchise consultant, advises reaching out to your franchisor and informing them of your intentions as soon as possible.

“You should alert your franchisor because the franchisor can then alert consultant groups that they have a resale and might be able to find you a buyer for your business,” said Daly.

Besides contacting your franchisor, there are several other steps you should take while preparing for your exit. 

1. Create an exit roadmap that outlines your desired departure time frame, contractual obligations and potential market conditions. 
2. Review your financial statements, and assess the overall health of your franchise. By understanding the value of your franchise, which includes its revenue, expenses and profitability, you can work toward making it more appealing to potential buyers or successors.

Both of these tips will make resale easier for you and make your exit a simpler experience.

Identify a Successor

Identifying a suitable successor is another significant aspect of the franchisee exit process. Something you’ll have to determine when it comes time to exit is whether you want to transfer the business to a family member, another franchise owner, a third party or back to the franchisor. 

Consider the guidelines set by the franchisor in your franchise agreement, as this party may influence or limit your options. In some cases, franchisors may require their owners to find their own replacements, while others may provide active assistance in the search, as noted by Daly. If you wind up being responsible for finding a prospective buyer on your own, enlisting the services of a broker can also greatly facilitate your search and increase the likelihood of a successful sale.

As mentioned, it’s crucial to assess the overall value of your franchise. Potential investors will want to go through the financials with a fine-tooth comb to ensure they’re not jumping on a sinking ship. Finding a successor isn’t easy and can take time. 

Dr. Ben Litalien, the franchise management program director at Georgetown University, told the IFA that he believes many franchise owners are failing to prepare for their eventual exit.

“The research clearly indicates that franchise owners are way behind the curve in preparing for succession,” Litalien told IFA. “Given the global demographic shift and the rapidly increasing value of franchised businesses, this needs to be a top priority.”

And Litalien’s suggestion doesn’t stand alone. In fact, the Canadian Franchise Association (CFA) also believes succession planning is important but isn’t focused on nearly as much as it should be.

“Succession planning in the event of the franchisee’s retirement or death is essential, yet often overlooked,” noted the CFA. “The effectiveness and level of sophistication of a franchise succession plan is context-sensitive, depending largely on the nature of the business, the ease with which franchisees may be replaced upon exit and the value of the parties’ investment in the franchise.”

Prepare for the Future

When it comes time to exit a franchise, careful planning is vital for a smooth transition. By developing a comprehensive exit strategy, being upfront with your franchisor and evaluating the health of your business, franchise owners will be able to identify a suitable successor. By doing all of the above, this will make the process of leaving their franchise much simpler.