Every franchisee has a moment or more than one moment when they think about leaving the franchise. Selling out, or just dropping out. This is a common experience among small business owners. Business is hard. Franchise business can be particularly hard, because in addition to serving customers and taking their money, you also must answer to the franchisor and give them your money.
Here are five key questions I’ve seen about leaving a franchise — with my answers.
- What are the most common legal mistakes franchisees make when exiting a franchise, and how can they avoid them?
The biggest mistake is an emotional error: shame. This drives almost all of the potential legal mistakes, which generally arise from a lack of communication due to embarrassment about the exit. Common legal mistakes include trying to sell the franchise out from under the franchisor (not getting pre-approval for the sale), or silently abandoning the franchise (leaving the franchisor with a vacant branded eyesore). Another common mistake is ignoring the non-compete to leverage all the franchise experience for a non-branded similar business within the scope of the non-compete. All three of these errors can lead to costly litigation.
- Which provisions of the franchise agreement should owners review most carefully before beginning the exit process?
The franchise agreement allows the franchisor to control your exit just like all other aspects of the business. Key clauses include transfer approval (the franchisor charges a fee for this, and gets to veto your buyer if they don’t qualify as a franchisee), lease assignment / assumption / sublet (in many FAs the franchisor also is the landlord), and branding (you have to strip the product identity off the location before leaving).
- How can franchisees work collaboratively with their franchisor to reduce the risk of disputes or litigation during an exit?
Like any business relationship, it’s personal. Befriend your franchise business consultant consistently. Lunch, coffee, dinner, holiday cards, just checking in by text: ingratiate yourself. People help genuine friends.
- What role do documentation, communication and timing play in protecting a franchisee if disagreements arise during the sale or closure process?
No amount of documentation is really going to “protect you” if there’s a disagreement. The best you can do is track how things fell apart. On the other hand, personable communication is key to getting what you need at every stage of the franchise — including exit.
- If you could give franchisees one piece of advice before they begin planning an exit, what would it be and why?
Be a good friend to your franchise point of contact, usually the business development or growth consultant.
