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Congress to Subsidize Selling Franchises to Vets

Soldier stands after securing outpost in Rajankala, Afghanistan
Soldier stands after securing outpost in Afghanistan photo/U.S. Army

WASHINGTON — A bill has been introduced into the House and now the Senate that provides tax credits to franchisors for selling franchises to veterans.

In June of 2009 House Representative Aaron Schock (R-IL) and Rep. Leonard Boswald [D-IA] introduced the Help Veterans Own Franchises Act (H.R. 2672). The act aims to change the 1986 Internal Revenue Code to provide a special tax credit for franchisors that offer veterans a discount on their franchise fee.  With now over 45 co-sponsors, the tax credit seems like a winner for representatives to give veterans a leg up when they return home. The bill incentivizes franchise sellers with a 50 percent tax break on the amount it discounts on the franchise fee.

Franchise fees are usually a rounded, arbitrary fee. For example, a Dunkin’ Donuts franchise fee can be as high as $80,000. The one-time charge is meant to compensate franchisor Dunkin’ Brands for the cost of screening and negotiating with a buyer. Ongoing support is charged through another fee, a monthly royalty and marketing fee such as a 12 percent charge on a store’s sales. Franchise owner-operators are often assessed an additional fee by the franchisor for training them to meet the chain’s operating standards and enhance their operating skills.

The International Franchise Association, a trade association that largely represents the interests of franchisors, is backing the bill. Alisa Harrison, vice president of communications and marketing for the IFA, says that the association has worked closely with Congress to get sponsors and to promote passage. “The bill was recently introduced in the Senate and we will continue to work aggressively on passage of this bill," she says. " We have testified twice in the past year."

The bill stipulates that its 50 percent tax break to the franchisor, that’s the seller of a franchise, would be capped at $25,000 for the unit that it could persuade veterans to buy. In that way a franchisor who decided to arbitrarily charge $100,000 for the privilege of buying its franchise would not be compensated $50,000 by the U.S. taxpayer.

The chair of the American Association of Franchisees and Dealers, a group that focuses on fair franchise contracts for the owner-operators of franchised stores and locations, is very concerned. “The discounts are funded by tax dollars,” observes Bob Purvin.

Dave Natonski, communications director at Representative Schock’s office, told Blue MauMau, “While franchises provide emerging entrepreneurs with important risk protections, a ready-made clientele, additional resources and guidance on how to operate a successful business within their community, these benefits are often outside the reach of veterans due to expensive franchise fees. By providing an incentive for franchises to discount the franchise fee for veterans, we can grow our nation’s small businesses and stimulate economic growth.”

The bill does provides a 25 percent tax credit of the purchase price to veterans. And the spouses of veterans would also qualify for the tax credit.

But Purvin emphasizes, “This is a negotiated tax incentive for franchisors.”

The head of the San Diego based association that champions fair franchising standards thinks this is chicanery at work. “Congress may be endorsing some very poor investment opportunities in the legitimate quest of helping vets to become gainfully employed,” declares Purvin.

The International Franchise Association held an event in the middle of September in which hundreds of its members met on Capitol Hill with congressional leaders to push the bill. 

Although the AAFD has not been involved in lobbying for many years, franchisee advocate Purvin is stirred up.

“The AAFD began as a legislative advocate and we changed directions when we realized that we couldn’t muster the necessary resources to make a meaningful dent in the legislative arena,” states Purvin. “Our effort was to define best practices in franchising, with a goal of influencing legislation down the road that would reward these practices. The law that is referenced could have been such a vehicle.”

Franchisee associations have generally not been watching this bill.

“CFA hasn’t been actively involved in this issue as it primarily involves franchisors,” says Misty Chally, the Director of Government Relations for the Coalition of Franchisees Associations. CFA represents current franchise owner-operators in retail chains such as Burger King, Pizza Hut and Supercuts. It primarily lobbies for franchise relationship laws that impact the operations of current franchisees.

The AAFD’s chair hopes that other franchisee associations will join him in his association’s fall conference in Washington, D.C. to become legislatively active. He adds, “I am hoping that the larger associations now realize what the effort will require and may finally be willing to step up to the plate and provide the kind of influence that could make the VetFran program an initiative we can all be proud of.”

Some in the franchise community question why a Republican would get the federal government involved in stimulating the sales of franchises and distorting the free market. Natonski answers, “By providing an incentive to reduce franchise fees for veterans, we can simultaneously help our nation’s brave men and women in uniform realize the dream of small business ownership after their service is complete and stimulate economic growth by cultivating America’s small businesses.”

“The bill could have been affected in a positive way,” says Purvin. He advocates that at the very minimum a franchisor be required to be “SBA qualified.” And explains, “The SBA has adopted rules which deny SBA guaranteed loans to companies that exert too much control over franchisees.”

“IFA has a strong record of encouraging all prospective franchise owners, including veterans, to do the needed research and due diligence before deciding to invest in any business,” says Harrison in response to Purvin. She adds, “There is current regulatory oversight to any prospective franchise owner to access needed information in determining if franchising [the licensing of franchises] is right for them or if a particular concept fits the bill.”

The bill currently sits in the House Ways and Means Committee, pending information on the impact of its tax credits to committee members from the administrator of the Small Business Administration and the Secretary of Veterans Affairs. Representative Schock’s office says that Senator Robert Casey [D-PA] has introduced the companion legislation into the Senate chamber.  “We’re grateful for this bipartisan, bicameral support of this important bill and are hopeful it will be considered soon,” stresses Natonski.

The IFA’s Harrison adds, “This bill is not about helping veterans find employment. It is about helping them take the skills they gained in the military and applying them in their own business.”

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