If you are just getting started as a franchisee or have closed your 100th deal already, having a solid exit strategy is essential to maximize the value of your system when you sell it. It is crucial to position your brand for future investment and sale opportunities, whether it is through private equity, generational inheritance, or conglomerate sales. You can maximize the value of your franchising system by following best practices and adopting intelligent strategies.
This guide will explore the winning franchise strategies every franchisor must know before selling their franchise. It will also show you what you can start doing today to maximize the value of your brand in the future.
Selling Your Franchise System
1. Begin With the End in Mind
When you are getting started with franchising, it is essential to begin with the end in view. Even before you sell your first franchise, it is suitable for your attorney to draft your Franchise Agreement and FDD. You can add value to your brand by incorporating your exit strategy into the legal foundation of your franchise system from the beginning.
- · Create a five-year strategy
Before selling your first franchise, it is a good idea for new or startup franchisors to create a plan that covers three to five years. This can help you clarify your vision and empower you to set milestones as you grow your brand.
What does the three to five-year vision of a new franchiser look like as we develop the FDD and the development strategy that’s embedded in it? What would a possible equity investment look like in years four and five? Consider your exit strategy when developing your five-year plans. Also, leave space for possible private equity deals for years four and five.
- · Legal Documents and Compliance Practices
A good exit strategy can be built around the compliance system of your franchise. This is an excellent approach for more mature franchisors who may have already taken some private equity.
“We have brands in acceleration mode. Some have taken on private equity and are in their second growth phase. There are also more mature systems. You can enhance your franchise brand by maintaining compliance with franchise laws. Keep your documents and filings current and have a plan to manage franchisee relationships.
2. Maximize your Brand Value by Following Best Practices
You can take several strategies and actions to maximize your brand’s value. This will make your franchise system more attractive to future investors.
- · Maintain Compliance
For your franchise system to maximize its value, it is vital that you ensure compliance with all federal and state laws and regulations. Avoiding regulatory violations, avoiding lawsuits, and ensuring all licenses and filings are up-to-date is essential.
- · Protect your Intellectual Property
Intellectual property is a crucial factor in franchising. Therefore, registering your trademarks at the U.S. Patent and Trademark Office as soon as possible and continuing to monitor those trademarks even after you leave your business is essential. IP is essential. Make sure you protect your entire IP portfolio, including trademarks and copyrights.
- · Establish Vital Item 19 Representations
A second way to maximize your franchising system’s value is by building solid financial representations. This is any written or verbal statement or communication that a franchisor makes to a potential franchisee or the public regarding the actual or possible financial performance of the franchised business. These numbers should be disclosed in item 19 on your FDD.
The better you’re Item 19, the more protection you will have. It will help you with franchise sales and remove the ambiguity surrounding wrong Item 19s. You can then focus your team on good sales techniques.
| Read More: Middle Market Private Equity
- · Limit your Legal Exposure
Private equity firms tend to focus on legal liability while acquiring a franchise. You must minimize any possible legal liabilities throughout your franchising experience.
It is only sometimes possible for a franchisee to avoid litigation. However, working with a franchise attorney can help you create a solid legal foundation to support your franchise. This is especially important when developing a private-equity exit strategy.
“Representations are a chunk of the contract between the private equity company and the franchise system selling. They’re essentially the seller’s promises. If the seller’s deposits are inaccurate, they can have some consequences.
- · Indemnification is a great way to Add Protection
While franchisors may be able to limit their legal liability by working with an attorney to create a solid legal foundation for their company, there is always the possibility of unanticipated risk when it comes time to leave a franchise. When selling a franchise, it’s crucial to work with a franchise lawyer to ensure that the legal safeguards, such as indemnification, are in place.
Due to limitations in insurance policies, franchisors need to be proactive with their private equity exit strategies and include indemnification clauses in future deals they make with private equity investors.
- · Select the Right Exit Strategy for You
Each franchisor is unique and has their own set of professional and personal goals. It’s, therefore, essential to know the options available and choose the one that aligns best with your goals.
3. Private Equity Exit
Exit strategies, or selling a franchisor’s franchise to private investors, have become popular strategies for franchisors in recent years. Private equity is one of many ways out of a franchise system. When thinking about exits, prepare the FDD and franchise agreement, and think about private equity. Private equity is going to be the most scrutinized.
Private equity exits require franchisees to go through a deeper financial and legal review than others. This is because private investors buy franchise brands to make excellent purchases. Therefore, planning your private equity strategies for exiting the business around private equity is a good idea. This will be true even if you decide to choose another exit.
- · Generational Inheritance Exit
While private equity exits for franchisors selling their franchise systems are popular, generational succession exits also work well for franchisors with children
or other relatives interested in acquiring the family franchise. It’s best to consult an attorney if generational succession is your preferred strategy.
- · Conglomerate sale exit
A popular strategy is for franchisors to sell their franchise system to a large conglomerate. The conglomerate will add the franchise to its brand portfolio. As with other exit strategies, consulting an experienced franchise lawyer is best to ensure your conglomerate strategy is developed correctly.
4. Franchise the Right Way
Franchising the right way, with the assistance of an experienced franchise lawyer, can provide many benefits. Working with a franchise law firm can help you succeed in your franchising journey, from FDD to exit. They will offer better legal protections, improved contract provisions, and enhanced due diligence.
By implementing these winning strategies, you can create a compelling and attractive franchise system that appeals to potential investors and fosters long-term success for the franchisor and franchisees.