If you’re coming to the end of your franchise agreement, it’s important you understand your options. There are a few different paths you can take, depending on your experience with the business and your ambitions for the future. Here’s our guide to successfully managing the transition.
It’s easy to become so consumed in the running of your franchise unit you forget to consider your next steps. When you reach the end of your contract term, you should be able to discuss your options with your franchisor, but it’s a good idea to explore them beforehand.
Your options at the end of the franchise agreement
Here are your three main options when you reach the end of the franchise agreement:
- Renew your franchise agreement - Your contract will automatically terminate at the end of your contract term, so you’ll need to renew it if you want to carry on operating your business. For this option, you must give your franchisor notice of your choice to renew the agreement and, in some cases, pay a renewal fee.
- Sign another franchise agreement - Sometimes, franchisees sign a fresh contract as opposed to renewing their old one. This route is useful if you’d like to tweak some of the provisions in your agreement, but you can also just sign an identical copy and continue on as normal.
- Sell your franchise unit - If you decide it’s time to move on, you’ll have to sell your business to a suitable buyer. Usually, the franchise agreement outlines the resale process; the franchisor may have the right of first refusal to buy your unit, or a potential franchisee in mind. Alternatively, you could find a buyer through an advertising campaign or sell your business to a family member or employee.
Of course, if you or your franchisor breaches the franchise agreement, you might stop your partnership before you reach the end of the contract term. See our guide to franchise agreement terminations to find out more.
Tips for selling your franchise unit at the end of the franchise agreement
If you choose not to renew your contract and instead end up selling your franchise unit, there are a few important steps you’ll need to take. We’ve created a guide to selling your franchise unit successfully, but here are some extra tips on making sure the franchise resale process goes smoothly.
1. Create a plan
Typically, franchise agreements last around five years - but you shouldn’t wait until the end of your contract term to start preparing for the resale. The key to making sure your business is attractive to potential buyers is having a robust exit strategy in place as early as possible. Then, you should be able to maximise the value of your unit in good time, and make sure it’s performing well when you need to sell up.
Remember, selling your franchise unit is one of the most important deals you'll ever make, so you need to get it right. The earlier you start to consider your exit strategy, the more chance you have of boosting your asking price.
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2. Tell your franchisor
The franchisor-franchisee relationship is based on trust and honesty, so as soon as you start to think seriously about selling your franchise unit, you should reveal your plans. After all, the franchisor decides how the process will work, and has the final say on whether you can accept your preferred buyer.
While you might find the perfect person to buy your franchise unit, the franchisor may believe they don’t have the right qualities, or may prefer to hand the business over to another interested party. And, if the franchisor does find a buyer on your behalf, they may ask you to pay a fee.
3. Maximise the value of your franchise unit
To appear attractive to prospective buyers, your franchise unit must be able to demonstrate strong financial growth. But, when a buyer is doing their due diligence, they will also look at factors like employee satisfaction and turnover to determine whether your business is worth its asking price.
You may need to make some changes in your business to boost its value, so planning early will allow time for your strategies to start making an impact.
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4. Prepare the paperwork
You’ll need to give potential buyers lots of information before you can decide on the business’s ultimate sale price. You should work with your franchisor to prepare the relevant paperwork in the form of a Prospectus of Sale document, which should include:
- A description of the franchise
- The history of the business
- Details of any commercial properties
- Details of any employees
- Details of any equipment owned or leased
- Copies of accounts from the past three years up to the present day
- A realistic asking price
Although you will want to make sure the prospectus shows your business in the best possible light, it’s important to remain honest and provide accurate information.
5. Value your franchise unit
Valuing franchise resales can involve a long and arduous process, taking into account your past performance, current cash flow and future growth potential. There are a few different ways to value a franchise unit and boost its asking price, but you will probably also go through a period of negotiation with prospective buyers.
Of course, you can always consult valuation professionals and your franchisor to make sure you get the best possible price for your business.
Make the right decisions when you reach the end of the franchise agreement
Whether you opt to renew your contract or sell your business, reaching the end of the franchise agreement can be stressful. You must be able to handle the transition successfully, while continuing to manage your business and make sure it carries on growing. The best way to make sure the process runs smoothly is to start planning well in advance and stay in touch with your franchisor.
Find more tips and advice in our other franchise guides; just use the search box to find the information you need.
Alice Tuffery, Point Franchise ©