Iceberg Corporation: franchisee exit strategy

Are franchisees making adequate provision for an exit strategy when buying a franchise? Are franchisors too profit focused and not giving enough consideration to the franchisee’s total gain, including the exit package?

According to the Iceberg Corporation , in the perfect world, franchisors will maximise the total benefit potential for franchisees. A new franchise should expect to provide a capital gain upon sale after a suitable growth period. The buyer of an existing successful franchise should expect an income stream relative to the ‘risk’, as well as the return of the initial capital on exit, with perhaps a growth factor.

A detailed analysis of the likely outcome when exiting the franchise is too often an exercise missed in the purchase process. When examining a brand, franchisees can be attracted by powerful influences beyond mere financial analysis. Influences such as emotional attachment and particularly the ability to become part of an industry they could not enter were it not a franchise. These influences can over power considerations such as exit strategies, which, if looked at closely and quantified, can significantly alter the prognosis.

A franchise with a higher income stream may be less attractive than a lower income stream franchise if the exit package (and ‘total deal’) is more profitable. The other key issue is timing. Should a good franchisee be penalised by exiting at a time which adversely affects the sale price.

But how much consideration is given by franchisors to the franchisees exit package? It is now usual in the larger shopping centre environments for instance, for fixed term leases of typically five or six years with no renewal. Add to this the volatile cocktail of soaring base rents, increasingly heavy set up costs, refurbishment with the new lease, transfer fees upon sale, and a franchise term which equates to the lease term. If the franchise is not exceptionally profitable, the payback period may well equate to the initial lease term.

Unless the franchisee has at the outset factored these issues into an exit strategy which takes the franchise to a second term (if offered) they can find themselves in a situation which will either cost them money because they ‘just want out’, or have to stay in the system longer than they wanted to.

In fairness, some franchise systems in that environment are now offering terms significantly longer than the lease, but franchisors will argue that to extend an existing term will weaken their control as (among other reasons) their powers of change are restricted during the term of the agreement and franchisee performance may weaken.

One could argue that this approach actually loses valuable franchisees as they have little choice but to exit early to allow sufficient upside for the buyer with the remaining lease/franchise term. Or their circumstances may simply have changed. Conversely, a franchisee may become stale and less productive by having to endure at least part of a second term, provided it is offered, to allow a sufficient payback period and achieve a profitable selling price.

Prior to buying, franchisees are wise to prepare an exit strategy based on all the known and projected parameters, and this should be as fundamental to their buy decision as any other factor.

Franchisors on the other hand, should be more attentive to the ‘total package’ they are offering and be prepared to show more flexibility in their approach to franchise terms. This approach on a case by case basis will provide performance based opportunity and motivation for the franchisee.

A franchise agreement should support, rather than impede, a franchisee maximising their outcome and allow franchisees to plan an exit strategy not dictated by that agreement. Happier wealthier franchisees and a stronger brand must surely offset any negatives to such flexibility?

Read on about buying a franchise and running a franchise.