Make an exit

Know your exit strategy before you enter into a franchise agreement, says legal expert Jonathan Chadd

Every franchisee (like any prudent business man or woman) should have a proposed exit strategy from their business. This may be a sale to a third party purchaser or a sale back to the franchisor or the individual franchisee’s retirement from the business and his succession by a member of his family. Such a strategy may change over time but any sensible business owner will be looking at some point to realise a return on all the money and hard work they have invested in the business.

The key difference for franchisees in this regard is that their rights to sell or pass on the business to a beneficiary are determined by the terms of their franchise agreement. It is, therefore, vital for any franchisee before taking up a franchise to examine carefully those terms in the franchise agreement.

The British Franchise Association’s Code of Ethics requires franchisors to ensure that their agreements permit the sale of franchised businesses by franchisees and also permit the handing-on of the business to a beneficiary in the event of the franchisee’s death or incapacity.

The important point for franchisees to take on board is that they need to understand the terms in the franchise agreement that affect their subsequent sale of the business before they sign the agreement. If they obtain proper advice at that time they will avoid any unpleasant surprises when they come to sell the business at a later date. 

Franchisors will want to ensure that anyone taking on the business is suitable as a franchisee, has the necessary financial resources and has been trained in the operation of the business system. An efficient franchisor will have a detailed set of procedures set out in its operations manual identifying the steps to be taken and when the franchisee wishes to sell.

Most franchisors will actively assist in locating a purchaser and/or will direct the franchisee to one of the franchise resale companies specialising in finding buyers for franchised businesses. As with selling any business it is important to prepare the business for sale and to collate the necessary documentation that a purchaser will wish to inspect to satisfy himself as to precisely what it is they are buying. The franchisee will be well advised to appoint an experienced franchise solicitor to act for him in connection with the sale and to do so at an early stage. This will enable him to take advice as to the information he will need to provide to a buyer and ensure that any timetable for the sale can be readily met.

Well-organised franchisors will have a standard form of business sale agreement, which they will provide to the franchisee and its purchaser to be adapted by their solicitors in order to reflect the particular commercial terms of the transaction. Most such franchised business sales involve not simply stock and equipment but also the transfer of employees’ contracts and, often, an assignment of a lease of premises. Instructing solicitors who can both advise on these aspects of the transaction and also understand franchising is important if it is to be dealt with quickly and cost effectively.

A franchisee proposing to sell is well advised to talk to their accountant and solicitor at the same time as they inform their franchisor of their plans as this will ensure that there is ample time to collate the relevant information and deal with the matter efficiently, and that is in accordance with the franchisor’s procedures and thus keep down the costs for all parties.  

You may also be interested in...