Owning a franchise business is different from owning an individual start up business in a number of ways. One of the clearest is the end game.
Your franchise agreement is for a specific length of time. An independent start up may hope to be bought out by some deep-pocketed competitor within a couple of years or may plan to spend 50 years in business and then hand the shop on to a son or daughter, but the decision will be theirs. Unless they’re in the high percentage of businesses that fail, the owners of an independent business can keep at it as long as they like.
But a franchise agreement might last five years or 25 years. There may be an automatic renewal as long as the franchisee has done well, or the deal might have to be renegotiated. There might even be a fee. These things should all be clearly spelled out in your franchise agreement, so make sure they are before you sign.
While franchisees who are following franchise rules and doing well may expect to be able to renew, the franchisor may not have to allow the renewal. Certainly, a franchise that isn’t performing up to par can expect not to be allowed to renew, as can a franchisee who is breaking rules (or laws). But franchisors may be able to refuse to renew if they are having problems with a lease or if they want your franchise for a nearby multi-unit franchisee who provides a better ROI. Again, these things should all be spelled out in your agreement.
The franchisee can also choose not to renew. Your agreement will probably specify a deadline for you to make up your mind, and you should go ahead and put that date on your calendar now. If you think you might want to do just a single term and get out, you should also plan for that eventuality.
Decide what you want to get out of your franchise in one term and plan ahead so you’ll get that.
- Profit. Don’t skimp on your business if you plan to get out in 5 years. You want to get out profitably if possible, either by selling the franchise at a profit or by running it profitably for the term of the agreement. You won’t do either of those things if you decide not to invest in marketing and operations in the early years. If your plan is to gain a profit in the short term, it would be wise to talk with a financial or business adviser who really understands finance. Making the right moves along the way can keep you from having put years into something that makes money for the corporate office but gives you just a salary.
- Knowledge. Getting an MBA can cost you $100,000 plus two years of your life. If you’re lucky, you’ll end up with some practical knowledge about running a business. Investing in a franchise can guarantee practical knowledge. And, unless you’re getting that MBA from a top-tier school, the experience may do more for your chances of getting hired by someone else than an MBA would.
- Satisfaction. If this one is at the top of your list, you probably won’t opt out after one term of your franchise agreement. Nonetheless, if your franchise does end after five years, you can certainly savor the pleasure you got from doing satisfying work. This option can also rack up the knowledge: now that you know what you love and how to do it, you can reenter the job market or open a new business with greater confidence.
