How Do I Exit a Failing Franchise? What Owners Should Know

When a franchise struggles to turn a profit, owners may start thinking about selling or closing the business. Before making that decision, it's worth looking at what can be done to improve performance and what options are available if those efforts fall short.

Running a struggling franchise can leave owners wondering whether it's time to cut their losses. However, poor performance doesn't always mean the business is beyond saving. Identifying what's going wrong and getting the right support can help owners determine whether to work toward a turnaround or begin planning their exit.

What Should You Do When Your Franchise Is Failing?

Before deciding to exit a failing franchise, owners should take a close look at the business's financial performance and daily operations. Understanding where the problems are coming from can help determine whether the location can recover.

Jessica Fialkovich, president and founder of Exit Factor, a company that helps business owners improve performance and prepare for an eventual exit, recommends starting with a thorough assessment of the business.

"They need to conduct a thorough analysis of the business, from its financials to its operations, to identify obvious issues and opportunities for improvement," Fialkovich said. "They may not be able to address everything immediately, but gradual, strategic changes can make a significant difference in getting the business back to where it needs to be."

Overspending is a common issue for struggling businesses. Fialkovich recommends reviewing expenses regularly to see where costs can be reduced or eliminated. Owners should also take a close look at staffing, since labor costs and the quality of customer service can have a significant impact on profitability.

For example, understaffing a restaurant can lead to long wait times, negative reviews and fewer returning customers. Hiring too many employees, on the other hand, can eat into already thin margins. Owners need to find a balance that allows them to serve customers without spending more than the business can support.

Can Your Franchisor Help Turn Around a Struggling Location?

Franchise owners have access to a resource that independent business owners often lack: an established franchisor with experience operating the same business model across multiple locations.

Fialkovich recommends that struggling franchisees speak openly with their franchisors about the problems they're facing. Other owners in the system may have dealt with similar issues, giving the franchisor experience to draw on when helping a location improve.

"Having a supportive franchisor to lean on is one of the greatest advantages of being part of a franchise brand," Fialkovich said. "You can draw on not only their knowledge of the business but also their experience helping other franchisees overcome similar challenges."

That support may help owners identify problems they haven't recognized on their own. Rather than waiting until the business reaches a crisis point, franchisees should communicate with their franchisor as soon as performance begins to slip.

When Should You Consider Exiting a Failing Franchise?

If operational changes and franchisor support aren't producing the results an owner needs, it may be time to explore other options. Selling the franchise is one possibility, although the owner's financial position and the terms of the franchise agreement will affect whether a sale is feasible.

Fialkovich recommends consulting an exit strategist when turnaround efforts aren't delivering the expected improvements. An outside expert can assess the business and help the owner decide what to do next, even if selling isn't an immediate priority.

"If you've made various changes to try to revive the business and you're not seeing what you were expecting or needing, I suggest connecting with an exit strategist," Fialkovich said. "Even if you're not looking to sell anytime soon, they will be able to take a deep dive into your business and make recommendations to help you get to where you want to be."

Owners considering an exit should also review their franchise agreements to understand the requirements for transferring or terminating the business. Depending on the agreement, selling or closing a location may involve franchisor approval, outstanding financial obligations or other contractual requirements.

Key Takeaways for Owners of Struggling Franchises

Before making a final decision about the future of an underperforming location, franchise owners should consider these steps:

• Identify the Problems: Take a close look at your finances and daily operations to see where things are going wrong. Start with expenses you can cut and operational problems you can fix.
• Work With Your Franchisor: Share your concerns and ask what resources are available to help improve the business. Other franchisees may have faced similar challenges, and your franchisor can help you learn from their experiences.
• Explore Your Exit Options: If your turnaround efforts aren't working, consult an exit strategist and review your franchise agreement before deciding whether to sell or close the business.

So, how do you exit a failing franchise? The answer depends on the condition of the business, the terms of the franchise agreement and whether the location still has a realistic chance of recovery. Fialkovich encourages owners not to give up too quickly. With the right guidance, some struggling franchises may be able to improve their performance, while others may be better served by preparing for a sale or another exit strategy.

For more information on exiting a franchise agreement early, check out these related articles on 1851 Franchise:

• How Do I Exit a Franchise Agreement? Understanding Your Options
• What Happens If I Want Out Early? A Guide For Prospective Franchisees
• Can I Sell My Franchise Later? A Guide For Prospective Franchisees