Are Taxes Inevitable? Four Options for Franchisors

We recently attended the second annual Dealmakers’ Summit in Chicago. The Summit is a fantastic event that brings together franchisors and franchisees and connects them with equity investors and service providers who can assist with transactions.  I was honored to address the group about some of the tax issues franchisors should be aware of, and here are a few of the tips we discussed.

We’ve all heard that there are two certainties in life: death and taxes. I agree that death is inevitable, but taxes aren’t—at least, not all of the time. In fact, franchisors have a few options:
  • Pay it. Sometimes, we simply cannot avoid paying taxes. An example that is challenging a lot of franchisors now is state income tax. Some states require you to pay income taxes if you have a franchise location there, arguing that this creates nexus, even if your headquarters are based in another state.  KFC recently challenged this in Iowa and it ultimately went to the U.S. Supreme Court, who declined to hear the case.  These requirements are changing almost daily as states look for revenue, and private equity investors generally expect their potential investment targets to be up to date on all state filing requirements, so franchisors should look to get it right now to avoid penalties.
  • Defer it. We can also delay some taxes. For example, franchisors can use accounting methods to defer taxable income such as gift card revenue in certain cases.   Other favorable accounting methods include using the cash vs. accrual method of accounting and accelerating deductions for prepaid expenses and compensation-related tax deductions.
  • Transfer it. There may be opportunities to pass along taxes to someone else. For example, through gift and estate tax planning, you can add a family member as a business owner. It’s important to be proactive and take this step early on from a valuation perspective—before the tax consequences become too expensive.
  • Eliminate it. Minimizing or eliminating your tax burden is the best option, right? Your heirs receive a step-up in tax basis for inherited property which effectively eliminates the tax on appreciation assets.  The good news is that there are ways other than death to reduce the amount of taxes you owe.
We plan to discuss these tax planning strategies in more detail over the coming months, so stay tuned to our practice for more information. Our thanks go to Susan Black-Beth, Dealmakers’ Summit Founder and COO of Super Wash, Inc., who put on an excellent event that we look forward to attending again in the future.