Franchise Lawyer Blog

The Wall Street Journal has reported that President Obama and congressional leaders plan to take steps to resuscitate the estate tax, also known as the death tax, despite years of efforts by various political interests to have it repealed. Why is this of interest to anyone reading this blog? It could be of enormous importance if you are a small or mid-sized business owner, as many franchisees and some franchisors are. Bear with me briefly and I will explain.
As commentators have noted , many small business groups, including the National Association of Small Business, have long fought for the repeal of the estate tax. But those efforts may ulitmately prove to be unavailing.
President Obama reportedly will propose that the estate tax be maintained at its current levels, rather than be permittted to expire. Current levels call for a 45% tax rate on individual estates valued at more than $3.5 million. Historically, the rich have found various means of avoiding the estate tax. But small and mid-sized businessowners have been less successful, in part because they do not have access to the tax planning resources that the rich do and in part because the asset in question, the family business, can be difficult to manipulate to a tax advantage.
Here is how the estate tax can affect you. Say you are the sole or principal owner of the entity operating a franchised business. You own 750 shares of XYZ Corporation, which owns and operates four franchised Salty Sea Dog seafood restaurants. The other 250 shares are owned by your two daughters, who work in the business. Let's assume you are divorced and the four restaurants all are doing relatively well.
Now you die (sorry). Your will provides that the 750 shares of XYZ Corporation pass to your daughters. The restaurants are valued at a total of $7 million dollars fair market value by a hired appraiser. Subject to some limited deductions and whatever else is in your estate, that valuation alone creates an estate tax liability of $1,575,000, even if your daughters do not sell the businesses. Where will your girls get that much money? They'll have to sell some or all of the Salty Sea Dogs. And there goes your family business.
The inclusion of a divorce in that scenario was crucial. There is an unlimited tax exemption for the value of the estate that passes to a spouse. But there is no escape for those who are divorced or widowed.
There are various planning techniques that can be used to diminish the impact of the estate tax, which an informed trusts and estates attorney can help you with. These steps can help you retain control of your business while developing it for the next generation.
Keep an eye on the news on this topic and think about getting in touch with your Congressman or Congresswoman. This matter has not yet been resolved and your input could matter.

Some of our prior entries have addressed issues relating to the franchise industry as a whole and the relative performance of the franchise business concept in an economic downturn. We have noted the failure of a system such as Bennigans. We commented upon some related concepts more generally in a subsequent post, such as what franchisees can do when a franchisor goes out of business.
As time has passed the downturn has continually revealed itself to be worse than originally expected. And yet there are some writers who suggest that franchising will weather this storm better than other business models.
Plug in the terms "franchising" and "recession" into a Google search and the first four entries offer favorable commentaries on the franchise model in a recession. One author notes how franchising offers the opportunity for the recently unemployed to "replace routine employment with self-employment," in fact, to create a whole new lifestyle by purchasing a franchise. Another website offers "recession proof franchises for sale." Some one else suggests that existing franchisors can expand in a recession, reasoning that "as job losses and redundancies kick in, many workers decide not to return to the workplace as employees."
Is this true? No one really knows. Economic facts frequently do not reveal themselves clearly until long after they have actually occurred. We are now told that we have been in a recession since last January, but no one told us that at the time. There are some economic indicators that franchising companies are not being punished as severely as the general economy. The Rosenberg Center Franchise 50 index (previously discussed in this blog) handled the severe downturn in the third quarter 2008 significantly better than the S&P 500, dropping .4% relative to the 9% drop in the S&P.
But there are other indicators that are less sunny. Those of us in the legal community are attuned to the possiblity of an uptick in lawsuits between franchisees and franchisors as either individual franchises or franchise systems fail because of economic hardship. Blogs and websites are tracking lawsuits, pending claims and troubled or troublesome franchised systems. It is premature to count those claims and measure them against prior time periods, but it stands to reason that hard times would give rise to additional claims.
Our firm is involved in the development of several franchise disputes that may form the basis for future entries. Another related topic that we will be commenting upon in future entries is the development of the low cost entry franchise, which should prove attractive in difficult economic times. In the past, first time franchisees had frequently financed acquisitions with home equity loans. As home refinancing has become more difficult, franchise opportunities that present a lower start-up cost look much more feasable. One example of this is the "man and a truck" model (or woman and a truck); one example of which is the Sir Grout home improvement system discussed in a prior post here.

In this country we have a national compulsion to rank things. If one enters "top ten" into a Google search, the first five entries that come up are top ten (i) urinals; (ii)shirts to get arrested in; (iii) time wasting websites; (iv) chemistry videos; and (v) books. The list is endless after that. So why not rank franchise systems? Entepeneur has done just that, featured today on AOL Small Business.
As it turns out, ranking franchises makes a lot more sense and is infinitely more informative than ranking urinals or chemistry videos. Entrepeneur has been featuring its Franchise 500, a registered trademark, for thirty years. An examination of the current list and the historical trends tells you a great deal about the successes and failures of the franchise concept as a whole, as well as how it works within particular industries. The rankings are established based upon financial strength, stability, growth rate and size.
This year's top twenty is dominated by fast food and fast casual dining (Taco Bell, Arby's, Dairy Queen, KFC, Baskin Robbins, Papa John's, Pizza Hut, Sonic, McDonalds and Subway), cleaning (Jani-Pro and Jani King), tax services (Liberty Tax and Instant Tax), hospitality (Intercontinental Hotels and Super 8) and assorted other industries (Ace Hardware, Super K convenience stores, Jiffy Lube and UPS/MailBoxes Etc.)
Running down the list, there are franchise systems for every business you can think of, and a few that probably would not have occurred to you: several tanning companies, wheelchair ramps (American Ramp Systems at 412), spray-on truck bed liners (Line-X Corp at 419) and pet waste removal (DoodyCalls at 452).
We are pleased to note the appearance of two systems with whom we have worked recently:
(i) Sir Grout Franchising LLC at 499, which was featured on this blog previously. Sir Grout's appearance is noteworthy because this is their first year of operation, an unusual characteristic for a top 500 entry. Sir Grout sells franchises in the business of grout sealing and restoration; and (ii) Four Seasons Marketing Corp., appearing at # 365, a company selling franchises in the business of selling sunrooms, windows, conservatories, solariums, patio rooms, deck enclosures, patio covers and pergolas, retractable awnings and greenhouses.
Entrepeneur is not the only publication to rank franchises. A quick search finds FranchiseBusinessReview, a website, which offers top 50 rankings in three categories (large systems, midsized systems and under 50 units).
Any prospective franchisee or established franchisor can learn something from these lists. Taking into account the fact that they are necessarily subjective by nature and skewed in favor of whatever measurement standards are being applied, they nevertheless can be useful when viewed year over year in terms of examining what types of franchises are finding traction in the nation as a whole.