As I sit here, just a few days before Christmas, I am watching the weather change outside my office window from relatively warm (for Minnesota), to downright cold. And like the weather, the one thing that we can always count on as the seasons change, is change in the political and legal landscape affecting business and franchising.
To begin with, franchisees should quickly get with their tax advisors to determine how they might restructure their income flow as a result of the tax reform bill that was signed into law at the end of 2017. There are both opportunities and challenges with this new tax structure and franchisees who do not take the time to understand these changes – and respond appropriately – may find themselves in a significantly worse position than those who take advantage of the new law. Maximizing the benefit of those changes, however, may require some restructuring, or at least, a realignment of the cash flow coming out of your business.
Additionally, in the fine print, folks need to find out how the new deductions and exemptions protocol might affect capital expenditures in their business, remodel obligations, or other events that have customarily had an effect on your taxable income and bases. Again, only a good visit with a knowledgeable and qualified financial advisor will be able to answer these questions for you.
Politically, at the national level, the push is going to continue to get legislation to relieve franchisees of the fear of a finding of being a joint employer along with their franchisors. On December 14, 2017, the NLRB reversed the Browning-Ferris standard that caused the concern to arise in the first place, meaning that the urgency to get legislation will probably die down significantly. However, it is my expectation that entities that have gotten a lot of political mileage out of making hay on this issue will continue to do so, and while I do not expect their efforts to go down, I do expect that the appetite in Congress to do something will greatly diminish.
Whether Congress gets involved or not, I think franchisees should expect a continuing expansion of the push for increase in minimum wage at the state and local level. For folks in the QSR sector, this is challenging news to say the least. The combination of a difficult labor market, combined with significant upward pressure on low-end wages, will put a real squeeze on franchisees’ profit margins and will take some careful planning to work around. Many systems are addressing these challenges not just with political activity, but also with an increased reliance on technology. I would expect to see that trend greatly accelerate as the minimum wage push spreads further and further across the United States.
On a macroeconomic level, all indications seem to suggest that while many markets are becoming saturated by particularized brands, the press by franchisors for new unit growth continues to be relentless. This is particularly true in systems where either the companies are public (as is the case with Dunkin’ Brands), or controlled by a private equity group. While franchisees may be able to take advantage of the franchisor’s offer to allow them to expand, they should be very careful about where that expansion takes place, as the headwinds of an economy with higher interest rates and potential inflation seems to be eminent.
Finally, in the franchise sector specifically, the North American Securities Administrators Association issued new guidelines to the states that are effective this year related to franchisor’s Item 19 (financial performance representations), in their Franchise Disclosure Documents. Franchisors will have to be much more robust in the information they provide to franchisees with respect to the performance of corporate and franchisee locations, representations they make with respect to subgroups of less than all franchise locations, and the way they present averages in the material. Franchisee advocates, such as myself, believe this is a tremendous step forward in helping franchisees who are facing renewal or expansion, or prospective franchisees, in getting a more realistic and transparent handle on the economics of the systems that they are considering.
As Ben Franklin said, the only thing that is certain is death and taxes. As for the rest of us, everything else can change: politics, law and the weather. Are you ready? •
Ronald K. Gardner is the managing partner of Dady & Gardner, P.A.