The Exit is Part of the System (Whether You Design For It or Not)

The end occurs when the franchisee leaves the system one way or the other, be it through retirement, divestment, expiration of their agreement, or perhaps even termination.

Those first two stages are front-of-mind for most professionals in the franchise industry because they’re the pieces that drive business growth and generate money. We often don’t like to talk or even think about the exit stage because it can get messy, and it doesn’t feel like business in the same way. Here’s the problem, though: The exit is part of the system, whether you design for it or not.

Exit planning importance

Planning for exits and offboarding is like tying up your horse. It’s a matter of responsibility but also something you ultimately do for your own good. Recruitment and onboarding pipeline might be the lifeblood of the industry, but meaningful offboarding is crucial to both maintaining its reputation and ensuring franchisors continue to learn from what’s actually going on at ground level across their systems.

A franchisee’s exit from your system can be an opportunity to become more efficient as a whole or a potential moment of vulnerability, depending on the situation and your system’s maturity. Thoughtfully built franchise systems that are designed to weather the highs and lows of economic fluctuations and deliver value to customers, franchisees, and investors alike can use exits as opportunities to tweak their system in ways that actually improve the positioning of their brand for all three stakeholder groups. For franchise systems built on pushing as many candidates through the turnstile as possible, on the other hand, the wrong exits can turn into a snowball of negative publicity.

If you follow the franchise news headlines, you’re probably aware of the fifty-plus Federal Trade Commission Complaints against home services brands Kitchen Tune-Up and Bath Tune-Up. Several of their former franchisees have been exceptionally vocal on social media this year, highlighting thin margins and a rush to terminate franchisees who could not keep up with royalty payments. Those unceremonious exits have sparked an entire online conversation about the fundamental honesty of franchising and the quality of opportunities that the industry offers.

Kitchen and Bath Tune-Up’s experiences illustrate exactly what happens when you focus on creating an attractive entry point without ever considering that someone might exit having not made money. Their operators felt betrayed, even ripped off. Enlightened minds can debate whether or not those franchisees executed a strong due diligence process, if they fully understood what they were signing up for, and if their expectations were reasonable, but regardless of those answers, there’s no question those franchisees could’ve been educated and managed better and, when it became clear their businesses were not viable, off-boarded in a less punitive and damaging way.

Lessons from failures

There are two clear lessons from that story: First, at exit, your franchisees will remember the promises you made to them when they first signed, one way or the other. Second, when your system doesn’t have a smooth off-ramp that leaves the entrepreneurs who took a chance on your brand feeling whole and like they were treated with professional respect, you’ll eventually do long-term damage to your ability to recruit the next round of franchisees.

That’s why, in this current climate, it behooves franchise brands to have a thoughtful approach to offboarding owner-operators, regardless of their reason for exiting the system.

So, what about the exits that aren’t contentious – the retirements of dedicated franchisees who’ve served your system for years, the resale or transfer of locations among successful operators, and so on? Franchisors don’t have as much to worry about in those situations, but that doesn’t mean there aren’t opportunities to make the most of the transition.

Each time a successful owner-operator, particularly a multi-unit operator, retires or leaves a system is a crucial chance to have a meaningful debrief and learn what you can from their experiences as a leader in your system, both on a macro- and micro- level. There’s so much that can be learned during the right exit interview and passed along to other franchisees or baked into future system-wide trainings. If you don’t have a net in place to catch those insights, they might just drift away out of your system.

Knowledge transfer

As the generation of franchise innovators who drove growth in the ‘80s and ‘90s approaches retirement, it’s crucial for the continued success of the industry and many of its brands for their institutional knowledge and wisdom to be passed along to the next generation. If someone has been an earner for your brand for years or decades, their exit is your last chance to squeeze every operational or cultural insight out of them. The best franchisors don’t just give high performers a gold watch or throw a party when they ultimately exit, they secure that operator’s lasting legacy by applying learnings gleaned from the totality of their experience.

It’s undeniably true that franchising and franchise development are thriving in the current economic climate. With that said, franchisee exit strategy is an area where many brands need to take a second look at their approach. When you view the exit as a key part of the business cycle, you can learn from your operators and even conduct offboarding in a way that potentially softens the blow of a suboptimal franchisee experience.

If you don’t account for the fact that some of the operators you sign will inevitably leave the system, you’re setting your brand up to look like a sales engine and not a thriving franchise network.