In short:
There are several differences between the closure of an independent and franchise business. Most arise from the inclusion of a franchise agreement, which can differ greatly between franchises.
Franchise model exit costs include early termination fees, projected lost royalties, admin fees and delivery costs of returning the franchisor’s assets.
Business closure specialists can help to close franchise companies, taking the weight off directors’ shoulders.
Closing any business can be a stressful process, but when it comes to franchise business closures, there are added factors that need addressing.
The addition of an extra party being involved (i.e. the franchisor), complicates matters somewhat, but don’t allow that to discourage you. A good business closure expert will be able to tell you just how to close a franchise business.
We spoke to our resident closure expert, Ben Westoby, about the ins and outs of franchise exits.
Can I close my franchise business?
“Yes! It’s perfectly feasible to close a franchise business” says Westoby. “In fact, we’ve worked on hundreds of closures for franchise companies with little-to-no issue.”
How does the closure of a franchise business differ from that of an independent?
“There are a number of ways in which closing a franchise business is different, with almost all of these concerning the franchise agreement itself.
“With a specific franchise agreement in place, there can often be a number of stipulations that will restrict how a director either navigates insolvency or looks for an exit route.”
Review your agreement
As the main issue to be addressed in any franchise closure, the agreement will dictate how you can go about your planned exit. You’ll need to go over this, ideally with a professional business closure agent, to decide upon your next move.
What am I looking for on my franchise agreement?
There are myriad ways in which a franchisor can affect your exit from the business. Most commonly these tend to be termination clauses, financial penalties, selling to another franchisee, or restrictions in what you can do afterwards.
Westoby explains that “it’s recommended that directors contact the franchisor directly to talk over the agreement and explain their intention to leave. If the business is trading well or is at least still salvageable, they often prefer a sale rather than closure. You may even find that this is part of the agreement. They may be able to gauge interest in your business among their other franchisees or ask that any interested parties you have sourced be vetted by them before any further action is taken.”
Avoid breaching your franchise agreement
If you’re found to have breached your franchise agreement in any way, legal action can be taken against you. Should a conversation with the franchisor provide you with permission to break any part of the agreement, you should ask for written confirmation of this to avoid any issues later.
Check your agreement’s expiry date
Most franchise agreements include an expiry date which the franchisee is expected to renew their contract before. These are typically set in five-year intervals but can be as long as 25 years in some instances.
Westoby adds that “If you are able to hold off shuttering your business till your expiry date, this can potentially make the closure significantly easier. It’s best practice, of course, to inform the franchisor of your intentions ahead of time so that provisions can be made by them. They may even agree to let you out of your contract a little earlier.”
Do you actually want to close?
If the only driver behind your decision is that you’re finding trading difficult, you may be able to modify the agreement with the franchisor.
Speak to them about the possibility of amending the agreement to make it easier for your business to operate. This could take the form of reducing your territory or lowering royalties in order to succeed.
Can you find a buyer?
This is almost always the preferred solution for the franchisor, and there may even be scope for you to recoup some of your investment in the process.
Approval of any potential buyers will likely be needed, but in general, this is often the best and easiest answer for franchisees looking to exit their agreement.
Repay debts
If you’re in a position to, repaying any debts on leases or equipment loans will make any closure much easier.
Of course, as much as they might like to, companies with distressed finances may not always be able to repay those loans. Should this be the case, speaking to a professional business closure company such as us should be your next step.
Check your franchise agreement for anything that may need to be returned too. Items such as signage or branded furniture are often expected to be returned to the franchisor.
How does liquidation work for a franchise company?
“Liquidation works in much the same way for a franchise as it does an independent business” says Westoby. “A liquidator will sell the company’s assets and distribute the funds among its creditors.
“As franchisees may need to return some items to the franchisor, they may not have as many assets as some other companies, but the process remains, with the franchisor simply listed as another creditor if there are fees owing.”
How much does it cost to get out of a franchise?
Franchise model exit costs can vary wildly, and while most are reasonable, some can add up to eye-watering amounts.
It pays to be on good terms with your franchisor, as there are a multitude of potential fees that can be charged for exiting an agreement. These include:
Early termination fees
Charges for lost future royalties
Administrative fees
Transfer fees if moving over to another buyer
Costs incurred for returning equipment, signage, or other assets
As well as these, you may well be liable for lease penalties and legal fees or damages if found in breach of contract.
Can I negotiate my termination fee?
Termination fees can be steep, and can be more expensive depending on how much time is left on the agreement.
“It’s definitely worth speaking to the franchisor to see if there’s scope to negotiate these fees. After all, there’s chance that they will end up with significantly less after all the assets have been liquidated. They may decide that it’s more prudent to take a lower amount than wait and potentially receive nothing” says Westoby.
What are the grounds for terminating a franchise agreement?
It’s typically quite difficult to find legal grounds to terminate a franchise agreement as they’re usually written heavily in favour of the franchisor. However, there are some factors that can warrant a termination.
Breach of contract – If the franchisor has promised something in the agreement that they haven’t delivered, such as training, equipment or goods, they can be said to have breached their contract.
Misrepresentation – If you were tempted to enter the agreement because of any aspect of the franchise opportunity that was untrue, you may have legal right to cancel it. Statements relating to costs, earnings, or the overall health of the business can be common areas for exaggeration.
Mutual agreement to terminate – If both parties are agreed, a termination can move ahead without trouble.
The franchisor folds
Consider your post-closure plans
Many agreements have clauses in place that restrict what type of business a franchisee can open after leaving the franchise. If you’re thinking of opening a business that operates in a similar sector to the franchise, you may find that your agreement blocks you from doing so for a period of time.
Speak to a closure expert
Although there are some extra aspects to consider when closing a franchise business, it’s nothing that a seasoned closure expert can’t handle. The best advice for anybody looking to close a business of any kind is to speak to a professional first.
“We take care of almost everything on behalf of the client” explains Westoby. “Our service is as much a means of lifting stress from directors’ shoulders as it is closing down businesses in the proper manner”.
Closing a franchise business?
Liquidation is almost always the preferred and easiest way to close a business, and we pride ourselves on delivering liquidation services that allow directors to dust themselves off and move on with their futures.
Occasionally though, there simply isn’t the funds or assets available to pay off a company’s debtors. In these instances, a formal dissolution can be implemented instead.
Not sure if you need a liquidation or dissolution? Simply take our Limited Company Dissolution Test to get find out.
Alternatively, you can call us on 0800 060 8505 or email advice@forbesburton.com for the best solution for your specific situation.
