Franchise owners are beginning to see the benefits of the effective use of professional counsel.
Contributed By: Gary F. Joyal
Franchise group networks are powerful and effective associations for franchisee owners. They afford the franchisee a forum replete with best practice tools and operational expertise, but the franchisee’s business remains independent, preserving that crucial entrepreneurial spirit that can thrive in the franchise ownership setting.
However, there are times and circumstances when the best interest of independent franchise owners are not, or cannot be, addressed through the franchise group setting. Franchise owners need to be very assertive and proactive when it comes to building their team for strategic planning, as well as unexpected scenarios that may occur.
Defining the Relationships
The Franchise Group – This group exists to help support your management and marketing areas to grow the franchise business. There is valuable knowledge and expertise at your fingertips as well as case studies for guiding your efforts. Look to your franchise group to assist you with training, customer lead generation, marketing, website development and moral support. The franchise group contains valuable members of your team, and you should maximize its ability to help you succeed, but relying solely on The Franchise Group for all areas of your business is a common mistake franchise owners make that can be a true detriment to your long term goals.
The best franchise owners have maximized their success by also having a team of professionals ready to act on their behalf as opportunities arise.
Legal Counsel – While the franchise group agreement probably has some legal time allocated for you as a franchisee, please know you still need your own representation to assist you with more sophisticated matters, as well as your agreement with the franchise group itself. In the event that your best interests either deviate or are unrelated to the interests of the franchise group, you need sound and non-conflicted advice. Thankfully there are a host of lawyers and firm that specialize in the franchised space and can be valuable stewards of the rest of your professional team.
Accounting Services – There are much more detailed accounting services needed when managing multiple franchise locations and/or agreements. Tax laws are constantly changing and a seasoned tax attorney along with a CPA familiar with franchise agreement structure is an integral part of your team.
Real Estate Advisors – The franchise group will have realtors available for you to use when considering a new location or negotiating lease agreements. However, you will be working within their time parameters and prioritized with other franchisees. A dedicated team of real estate advisors working with your professional team will have you as a top priority.
Lenders – In order to quickly manage deals, working capital is imperative. Franchise owners operating with a team concept have their lenders engaged on a regular basis to manage the portfolio needed to secure funding for transaction that need to move quickly.
The most common resistance to building out a team with outside professionals is money. It is a valid concern and yes, utilizing this approach is more expensive than managing the transactions on your own. The concept is not as advantageous for a franchisee operating one or two businesses in a location where they plan to stay indefinitely. Those who benefit the most from the arrangement are franchise owners who operate multiple franchises in multiple states, franchise owners who plan to grow to that level, or franchise owners who plan to conduct annual transactions of selling or acquiring franchise operations. In these cases, the team concept often provides a significant cost savings by being able to execute all of the moving pieces of the deals, being able to take advantage of growth opportunities that could not be consummated out of cash flow, and being able to maximize the legal tax benefits that can be derived by such transactions.
Side Bar or pull out box:
Critical timing components of Section 1031 of the Internal Revenue Code Like-Kind Exchange
The Identification Period: This is the crucial period during which the party selling a property must identify other replacement properties that he proposes or wishes to buy. It is not uncommon to select more than one property. This period is scheduled as exactly 45 days from the day of selling the relinquished property. This 45 days timeline must be followed under any and all circumstances and is not extendable in any way, even if the 45th day falls on a Saturday, Sunday or legal US holiday.
The Exchange Period: This is the period within which a person who has sold the relinquished property must receive the replacement property. It is referred to as the Exchange Period under 1031 exchange (IRS) rule. This period ends at exactly 180 days after the date on which the person transfers the property relinquished or the due date for the person’s tax return for that taxable year in which the transfer of the relinquished property has occurred, whichever situation is earlier. Now according to the 1031 exchange (IRS) rule, the 180 day timeline has to be adhered to under all circumstances and is not extendable in any situation, even if the 180th day falls on a Saturday, Sunday or legal (US) holiday.
The concept of the professional team approach is best expressed through the following case study:
“Mr. Jones” was the owner of 13 Dunkin Donuts in Massachusetts. He planned to move to Florida for family and lifestyle purposes but wished to continue as a Dunkin franchisee in Florida. Prior to embarking on that major strategic shift, Mr. Jones secured the team at Joyal Capital Management, LLC (JCM) to augment his operation. Our firm quickly engaged its client data base and began surveying the franchise mix. We were able to secure two distinct store networks for purchase in the same Florida micro trade area, no easy feat. With replacement assets identified, the focus became one of timing as Mr. Jones needed to structure the sale and subsequent purchases under the 1031 exchange code rules in order to utilize a deferred tax approach in the transaction, a major point of value for Mr. Jones and his overall worth.
The main issue became one of timing and execution risk as, once the sale of Mr. Jones’s Massachusetts assets was consummated, the 45-day clock was ticking to officially identify replacement assets and close within 180 days. With timing so critical, the deep and long held relationships from JCM’s professional team became paramount to complete the acquisition of the 36 new restaurants in a tight time frame. The firm utilized expert franchise attorneys to prepare the handling of lease assignments, banking files, franchisor approval process, and store transfer documents. The task involved 36 distinct lease assignments, more than $30 million of bank financing, two states, three franchisee groups, and all within the required time frames of a 1031 exchange. While Mr. Jones may have been capable of handling the process, the probability of doing so within the time frame was very unlikely.
Mr. Jones’s decision to utilize JCM and its numerous financial services produced winners from all angles
- The acquiring franchisee of Mr. Jones’s New England stores obtained a pristine network to further grow his already substantial and impressive operation.
- The selling franchisees in Florida obtained fair values on their networks and achieved enviable investment returns for their stakeholders.
- Mr. Jones was able to roll his New England profits into a new Dunkin investment in a growing market, and now has capital and territory rights in order to facilitate the growth that he was eagerly seeking.
- The Franchisor solidified franchise operations in two states and linked an aggressively developing franchisee with a target area for development.
(Editor’s note: The transaction noted above earned Joyal Capital Management, LLC and its client a 2014 Dealmaker of the Year Award from the Franchise Times. JCM refers to their professional team concept as a Private Family Office.)
About the Author:
Gary F. Joyal is the founder of Joyal Capital Management LLC and has been a trusted advisor to clients and a leader in the financial advisory marketplace for nearly 30 years. JCM was founded on the principles of estate planning, retirement planning and business services, but under Gary’s leadership has grown to become a leader in debt and equity placement as well as Mergers & Acquisitions in the Quick Service Restaurant (QSR) space.
For more information visit, www.joycapmgt.com