Disclaimer: The information here is based on the collective 20+ years of experience of the franchise development team here at Oakscale and to provide a general overview to a document that is of huge importance in the sales process of our brands as well as all other franchises. That being said, we HIGHLY RECOMMEND that if you are currently exploring franchise opportunities you hire a franchise attorney as well as an accountant to review Franchise Disclosure Documents with you before ever signing a franchise agreement.
If I buy a franchise, what happens if I don’t want to own that business anymore?
Franchise agreements are typically 10 year agreements, but can range anywhere between 5 and 20 years. This can be a bit daunting. How do you know what’s going to happen 5 years from now, let alone 10? What if you want to do something different and you’re only halfway through the term of your contract?
Below we’ve listed out some of the more likely scenarios, but these are not exhaustive of ALL potential scenarios. In order to truly understand exit strategies for a particular franchise, you’ll need to review that brand’s specific franchise agreement and get advice from a franchise attorney. Anyway, here are some of the more common questions answered.
What happens when the term expires?
Most franchise agreements come with optional renewal periods. So, assuming it’s a 10 year agreement, around year 9, you and the franchisor will both decide if you want to renew for an additional term.
Usually, there’s alignment on this decision. If you’re a profitable franchisee that follows the system, there’s no reason a franchisor wouldn’t opt to renew your agreement. Now, they may have some requirements like upgrading your equipment or signage, but ultimately they want their royalty stream from your operations to continue for as long as possible. At the same time, if you’re making money and happy, you’ll probably want to renew your agreement as well.
On the contrary, if things aren’t going so well, you and the franchisor may just decide that it’s best to part ways. In this case, you’ll have a couple of options. You can close up shop. Or you can try to sell your franchise.
What happens if I decide I want out of my agreement before the 10 year term expires?
People exit franchises for an array of reasons. It doesn’t mean the business was failing. Sometimes people just get tired of the day to day and want to do something different, or something personal comes up that requires more of their attention. And, in some cases, they’re struggling with the business and can’t afford to keep operating.
No matter the reasons, the vast majority, if not all, franchisors allow their franchisees to sell their franchise. While many franchisors have a right of first refusal, meaning they can match any offer you receive for your business, they will not get involved in your negotiation.
The franchisor does not get involved in your negotiation because they are in a tricky situation. They want you to sell your business for the most money possible so that you exit the system happy and have good things to say about the brand. But they also want their new franchisee (your buyer) to get the lowest price possible so that they will get a great return on their investment and be happy franchisees.
The only role that they play is in approving the new franchisee. They’ll need to go through a qualification process (just like you did when you initially were approved for the franchise) and satisfy all of the necessary requirements legally and financially.
If I can exit the business by selling, why have a contract period at all?
Well, things change over time, and the business you buy today may not be the business you operate 10 years from now. Laws change, technology evolves, etc. By having an end to the franchise agreement term, both parties insure that their mutual agreement and expectations will be appropriate given the then-current state of the business.