Rob Branca
This past August , the IRS proposed a rule changing the valuation of interests in closely held businesses . In plain English , the proposed rule change is bad for franchisees .
Multi-unit franchisees were well represented among the more than 8,000 written responses to the proposed change . And on December 1 , among the nearly 40 citizens who spoke at the IRS public hearing (“ Estate , Gift , and Generation-Skipping Transfer Taxes ; Restrictions on Liquidation of an Interest ”) were Keith Miller , a Subway franchisee and chair of the Coalition of Franchisee Associations ( CFA ), and Rob Branca , a Dunkin ’ Donuts franchisee and vice chair of the CFA . The CFA represents 41,000 franchisees at 86,000 locations employing about 1.4 million people .
While speakers from businesses as varied as auto dealers , CPAs , and the National Cattlemen ’ s Beef Association testified to the rule ’ s negative effects , Miller and Branca explained why the proposed change would be particularly harmful to franchising . In their own words , here ’ s why . ( Note : They are transcribed from the hearing and may contain inaccuracies .)
Branca : Franchises are especially vulnerable if these regulations are amended because of factors particular to franchising that naturally depress a business ’ s price . A franchise inherently becomes less valuable for every second ticking by after a franchise agreement is signed ; ownership of a franchise is only for a set , continually declining term of years . There is no certainty of renewal for an additional term .
The traditional methods of business valuation that the IRS applies simply do not accurately capture vital facts that affect value . Perhaps more notably , there is an omnipotent third party in franchise transfers that is not present in a non-franchised family business : the franchisor . Franchisors typically possess the power to not only apply not insubstantial fees on transfer , franchisors can also deny them outright .
Franchisors also typically possess a right of first refusal to step into the shoes of any transferee . Transferees often price
Regulatory Unburdening ? to do a better job all around .”
Not only does most of the general public think the franchisor is the employer at the local level , so do a majority of employees , according to a recent survey . Says Robins , “ We ’ re still local businesses that operate in the communities we serve . I ’ m not one big business , but 51 little businesses .”
Operators must learn to educate people — customers , communities , city councils , and Congress — about the franchise model and its role in the economy , agrees Lotito . And while the chances to do so are plentiful , for the most part they ’ re being wasted . “ Generally speaking they don ’ t take advantage of the opportunity : ‘ Let me tell you how many people I promoted last year , how many wage increases we gave , jobs we created , our health insurance plan , how we helped celebrate the birth of an employee ’ s new child with
time off .’” Instead , he says , franchisees are letting others define who they are , “ a horrible mistake .”
Lotito , who says he ’ s constantly amazed by franchisees doing so many wonderful things and not telling the world , suggests investing time to train their managers to have those talking points at hand when they interact with the public . “ Running the business is a lot more than pumping out a donut , a coffee , or a pizza .”
IRS Proposed Rule Change Hurts Franchisees
the uncertainty created by these franchisor rights into the purchase price , knowing that the time and money spent on due diligence , negotiation , attorneys , and accountants can be completely lost . However , perhaps the most discounting factor in valuation of an interest in a franchise is the severely limited pool of buyers . Only an approved franchisee of the system is even eligible to buy at all .
Miller : While our ongoing business may be valued at one price , our ability to sell at that price is often severely impacted by the franchise business model . Many obstacles to our ability to sell may not be included in our contract , the actual franchise agreement , but may be inserted over time unilaterally in our operations manual during the life of that franchise . I ’ ll give some specific examples in my own brand , Subway .
There are clauses that state that transfers cannot have multiple franchises on one contract or include conditional contracts . For example , the sale of one franchise is conditional in the sale of a second franchise or the real property related to that franchise .
It also has a clause in there that says you can only transfer one store at a time to a new
Keith Miller franchise owner or up to three to existing franchise owners , and they do limit us in this way .
So these specific clauses negatively impact the value of our franchises . For example , if you own the property that your franchise is located on , you can ’ t conditionally sell them both on the same contract .
Or if you own say 10 or 20 stores , you would have to break up your company to sell the individual units . I think you can clearly see that in total , a company of a large franchise owner , with all the overhead structure and efficiencies in place that are built into that larger company is more valuable than when broken into individual stores and without the real estate .
So I ask you , how can you properly value a company when you can ’ t sell the company ? While these examples are specific to Subway , many franchises follow similar policies , so we would respectfully ask that you reconsider this rule change .
60 MULTI-UNIT FRANCHISEE ISSUE I , 2017