Before you buy a franchise, plan your exit

Sarah Stowe

Inside Franchise Business: plan how you will exit your business before you startEven before you enter into a franchise business, be sure you have an exit strategy in mind so you can work toward it without unexpected problems.

Every business has the same goal: to make a profit. And, eventually, every owner will eventually exit their business.

Whether this be in the short term, say three years, or in the longer term, say 10 years, all business owners should have an exit plan. This should ensure your personal goals are in alignment with your business goals.

If you are a franchisee, it is best to start planning early – preferably at the outset. When you buy into a franchise, it is important to have an exit strategy in mind and plan for that. As some franchise businesses are only short term, having an exit strategy early is even more important.

There are three main benefits to having a formal business-exit plan: it helps protect one of your most important income-producing assets, your business; it helps maximise business value; and tax-saving strategies are put in place early to avoid nasty tax surprises when the franchise is sold.

Here is a checklist of some of the things you need to consider…

  • What net proceeds of sale will you be seeking to fund your retirement?
  • What profitability and assets will this need?
  • When will you want to transition out?
  • What will you do once you are no longer involved in the business?
  • What will be your income source after you exit?

You need to consider the exit options your business offers, and how these fit in with your personal circumstances. For instance, do you sell to another franchisee? Can the franchise be sold in an open market or does the franchisor control who buys your business (and help in selling the business for you)?

Another option is a management buyout. For example, a manager will take over the franchise either in full or part, and some ongoing income streams might be retained by franchisee.

You also need to know if there are exit fees, obligations and requirements upon sale. Also, can the franchise be sold, or does it terminate if you exit the business?

Ask important questions early

However, these are some of the questions you should be asking when looking into buying a franchise – not when you are ready to sell.

Your business may be one that will generate a high level of income and cash flow, but have limited capital growth on sale. In this case, your strategy will be to recoup your capital investment, and build up and invest enough cash reserves to fund your retirement or to take up other business opportunities once you exit the franchise.

Alternatively, your business may offer significant capital appreciation on sale. If so, having a growth plan for your business can make it more attractive to a potential buyer.

In both cases it is important to obtain professional advice as to the best structure to run the business through, and which tax-saving and asset-protection strategies to implement from the start. Even if your structure is not correct now, you may be able to rectify it to ensure you have a good exit plan.

When you are seeking a significant capital payout when exiting the business, it will be necessary to have a good idea of the value of your business as you are going along. This will need professional help (business owners tend to overvalue the worth of their business).

Your exit plan will also take into account the possibilities of unexpected contingencies such as no longer being able to work in the business because of illness, death or other unforeseen circumstances. Adequate death and disability insurance needs to be in place, or a plan that can be implemented if these situations arise.

So, set your goals and plan your exit. Having an end game means you can work back and pick the right business for your own personal needs.