If you are a franchisee or licensee, the question of whether or not you "own" your business will be a key issue in determining whether it realises a capital value for you when you come to sell. Ownership in this context includes the unfettered right to sell your business on the open market for value to the purchaser of your choice. This will usually be dependent on the terms of your franchise agreement.

The growth of franchising

The impact of franchising on small business has been dramatic. The number of franchises grows steadily as an increasing number of established businesses recognise the opportunity to utilise their brands and operating systems to expand their empires. Also, an increasing number of smaller businesses are now considering franchising as a legitimate two-stage exit option: an action recommended by exit strategy planning specialists.

All this should be very healthy for the private business sector and in most respects it is. But, one aspect of the burgeoning franchise industry is perhaps not getting the attention it deserves, namely do franchisees actually "own" their businesses, or does real ownership reside with the franchisor, in the sense that he dictates the method, the price and to whom the franchisee businesses can be sold?

Not only does this question have important implications for current and potential franchisees, but it could also adversely effect the longer-term interests of franchisors themselves in so far as it could affect their ability to recruit and retain quality franchisees.

Ownership differences

There is no simple answer to the ownership question, as there are as many types of ownership as there are franchise or license agreements.

At one extreme, for example, large well-established franchise operations have clear exit policies for their franchisees, which enable franchisees to dispose of their business for value in a similar way to "normal" privately owned businesses. These franchisees will have the business structure (that is an owner/management/employee hierarchy, tested operating systems, and a substantial turnover and profit) that will appeal to potential purchasers in the open market. Also, the "buyer suitability test" imposed by most franchisees will not unduly restrict the pool of buyers. (Examples of these sorts of franchise groups would be the multinational food franchisees, such as McDonalds.)

At the other extreme, small licensees (who are indeed often sole-traders) are, in reality, "self employed" employees, whose license agreement enables them to earn a reasonable living, but does not necessarily enable them to make a capital sum on exit. Without the ability to build up and realise a capital value from the sale of their businesses it is difficult to see how these licensees (or franchisees) can be considered to own a business at all, if one accepts that the main difference between owning a business and being employed is the ability to build a capital asset of value. (Examples of "self employed" employees can be found in the financial services industry.)

Where do you sit?

As a current (or potential) franchisee the degree to which you can be considered to own your business will be determined by your franchise or license agreement. Many of you, in your understandable enthusiasm to start your new business will, perhaps, not have studied the exit implications of the agreement too closely. However, its impact could have a profound effect on your wealth when you wish to exit the business.

Having read the agreement, you might be surprised to discover that, either

• You have no right to sell your business on the open market, or
• Your rights to sell are severely restricted

Where you have no right to sell to a third party, you could find that your principal reserves the right to buy back your business on terms that are unfavourable to you (for example, the price could provide inadequate compensation for the goodwill value you have built up).

In the case of a restricted sale, it is imperative to be aware of the restrictions as they could make it extremely difficult for you to find a "suitable buyer", which could, in turn, diminish the business's appeal to potential buyers (who will face the same restrictions when they come to sell). Both of these facts could reduce your business's value.

Franchisees' solution

1. Potential franchisees

When investing in a franchise it is important to consider capital value as much as income potential. You are going into a business, and business is about capital as much as it is about earnings. So, study your franchise agreement: what does it say about exit and are these conditions likely to result in your achieving adequate capital compensation for your long term efforts?

2. Existing franchisees

If you are concerned that your business's future capital value might not be commensurate with the effort you have put into it, the first thing to do is to clarify the exit terms of your agreement with your franchisor. If, having read your agreement, you discover that you have less freedom to sell than you imagined, you should discuss your situation with your franchisor to see whether his policy can be changed.

Franchisor solutions

Franchisors are becoming increasingly aware that their biggest challenge is to attract and keep good franchisees. One of the keys to this is to establish a franchising system in which franchisees are able to build up and realise a capital value in their businesses. As I said previously, a constructive approach to exit strategy (and succession) planning amongst franchisees is commonplace in most multinational franchise operations, but it is still not so common in other franchise groups.

In the insurance sector, for example, UK insurance companies have been slow to follow their overseas counterparts (notably in the U.S. and Australia) in introducing an exit strategy policy that recognises that their self-employed agents own a business, and in assisting them to develop ways in which these businesses can be transferred to other agents for value. When one considers the difficulties companies face with retaining the best agents and the losses incurred with "orphan" registers, it is puzzling that the ownership issue has not been tackled more creatively.