According to the IFA’s Franchise Education and Research Foundation, the Tax Cuts and Job Act of 2018 (TCIA) is having a positive impact on the future growth of the franchise industry. This is due to the cut in the corporate tax rate and certain benefits provided to owners of pass through entities, and the boost to household incomes that has increased consumer spending this year. This is a continuing trend, in that, the same report shows that in 2017 the franchise industry grew faster than the overall economy of the United States.
With the above trend growth predictions, multi-unit franchisee owners, more than ever, need to be well equipped for their own growth, whatever that may look like. Michael Iannuzzi, CPA, CFE, who is a partner and co-leader of Citrin Cooperman’s franchise practice says, “Multi-unit franchisees should be laying out a long-term profitability budget, and even more importantly a long-term cash flow budget so they can project what their capital requirements are to accurately fund and meet their development schedules.”
Also, important when looking at growth is if you will have or will be creating additional debt. Iannuzzi’s opinion for those going this route is, “Multi-unit franchisees could be financing growth via debt (especially larger brick and mortar type concepts), and they tend to focus on the profit and loss statement and lose sight of the balance sheet. The debt along with other non-P&L items could put a cash strain on the business which could lead to falling behind on required income tax payments and related financial covenants tied to the debt. A business could be highly profitable and realize come tax time they have little to no cash to pay taxes because they were not properly budgeting for their cash needs related to taxes, and, no one may have been advising them throughout the year as to what their potential tax liability could be. The worst-case scenario is running out of cash and having to desperately sell off assets, which defeats the growth process.”
Simply put, when looking to grow, crucial factors to consider are:
Evaluating if the path for growth is obtainable (i.e. will you be creating debt and if so through what vehicles)
Making sure you have the right business structure in place to ensure positive cash flow
Obtaining growth through brand or portfolio expansion is one of the fastest ways to ensure growth (and of course, debt).
Another avenue that garners growth is being involved IN and FOR your community. In a recent article, “Remain a Positive Influence in Your Community” we explored the importance of building relationships and rapport in the communities where you operate. Regarding the importance of community involvement, Iannuzzi offers, “Franchisees should be getting involved with their local communities and networking and growing the brand locally. The national advertising fund is powerful, but franchisees should not be placing all their reliance on it, especially if they are in a new market for the concept which may have little to no national advertising funds being allocated to it. There is simply no substitute for getting out in the field and having people getting to know you and your concept and engaging with existing and new customers.”
If you are looking to grow, or are in the middle of a growth season, consider the insights shared by Michael Iannuzzi of Citrin Cooperman. Be on the lookout for future installments where we partner with additional industry advisors on areas of your business in which you may need extra ears, eyes, or hands.