Making an exit

More and more franchisees these days are taking on franchises as a short-term investment rather than for the remainder of their working life. It is therefore very important for franchisees to carefully consider their chosen franchise to ensure that it will not only provide an income but also an opportunity for capital growth.

The key issues for people thinking of taking on a franchise to consider are:

Renewal rights

There is no automatic right to renew a franchise implied by law. It is therefore essential to ensure that the franchise agreement contains the right to renew once the initial term has expired.

The renewal rights that franchisors are prepared to grant will vary. Franchisees need to plan their exit strategy accordingly, depending on whether the renewal rights are continuous or are limited to a certain number of renewals.

The conditions and cost of renewal should also be considered. Typical renewal conditions will require the franchisee to undergo retraining and, if appropriate, refurbish premises or upgrade the franchise business to meet current standards.

Sale rights

A resale opportunity often occurs where a franchise being sold has proved to be a success and it is sometimes the only opportunity for a franchisee to join a mature and otherwise full franchise network.

The 2005 bfa/NatWest survey established that 35 per cent of franchise businesses acquired during the past year were resales. Franchise resales are now a regular feature of the franchise industry and the market for resales is likely to increase, as more and more established franchisors sell all exclusive territories and the franchise industry in general continues to grow.

Franchisees should plan early for an exit as there are commercial and financial measures that can be taken to minimise tax and maximise saleability and balance-sheet attractiveness. In some cases, this should take priority over short-term, take-home profitability. Accountants and banks will assist in planning an exit strategy and this will often be considered during the initial funding stage anyway.

In addition, some franchisors will have an established resales policy and procedure, which will assist franchisees in determining saleability and typical resale prices in advance. The franchisor's consent will be required on a sale, but ideally the franchise agreement will contain the provision that such consent won't be withheld when the purchaser meets the sale criteria set out in the agreement.

An important aspect to consider before entering into a franchise agreement is the term granted to potential resale buyers. In other words, would they acquire a new franchise term, plus renewal rights, or would the franchisor only be willing to permit a sale of the current franchisee's unexpired term along with the existing renewal rights? If it's the latter case, this is likely to have an impact on saleability and sale value.

Death or incapacity

Franchisees should ensure that they and their estate are provided for in the event of death, a critical and long-term illness, or in the event of an accident. It is usual for the franchise agreement to make provisions for the business to be transferred to a suitable beneficiary or a purchaser in such circumstances.

However, strict time limits usually apply and there is no guarantee that the business will be sold within the specified period. Nor is there a guarantee that a suitable purchaser will be found, or that the sale price will be sufficient to provide for the franchisee or its family.

Franchisees may therefore wish to ensure that they are not solely reliant on the franchise for their income, and that they are covered by a suitable insurance policy.

About the author

Caroline Abrey is the corporate franchise partner at Shadbolt & Co Solicitors and can be contacted on 01737 234 669 or caroline_abrey@shadboltlaw.com. For commercial queries and enquiries concerning a franchise dispute, contact Kate Matthews on 01737 226 277 or email kate_matthews@shaboltlaw.com.