Industry experts share their predictions on what challenges and opportunities lie ahead for members of the franchising community in the new year.
The franchising industry has seen many changes over the course of 2017. After the uncertainty that followed the presidential election in 2016, this year has been filled with new legislation and a different kind of economic environment that’s pointing towards an optimistic future. But what does that mean for the franchising industry going forward?
For starters, it means that there are a lot of new factors that franchisors need to take into consideration. And according to Lonnie Helgerson, president of Helgerson Franchise Group, one of those things that needs to be made top of mind is the Financial Accounting Standards Board’s (FASB) new revenue recognition language.
“One new thing that franchisors are going to have to deal with this year is the Financial Accounting Standards Board’s accounting standards. I think that this is something on everybody’s radar, but it isn’t set to take effect until the beginning of 2018,” said Helgerson. “This is going to impact the way that brands record revenue, and it’s likely that this will have a bigger impact on brands than they may expect. So, it’s going to be interesting to see how these revenue-recognition rules take effect.”
There’s been a lot of confusion surrounding the new rules, which take effect for public companies in 2018 and in 2019 for private ones. Specifically, there was a lot of discussion surrounding how initial franchise fee revenue was to be recognized. It was initially thought that franchise fees would have to be written off over the course of the franchise agreement. That meant that instead of being able to use that investment to help with year one expenses including site selection and training, franchisors would have to report that revenue over time. For emerging franchisors, that posed a challenging problem. However, the FASB clarified its position, saying that reporting the revenue of a franchise fee comes down to whether or not there are pre-opening services that are a separate deliverable. If none of the pre-opening activities contain distinct services, that’s when the franchise fee must be recognized over the entire license period.
Beyond the FASB’s new revenue language, there are major pieces of legislation poised to change the narrative in franchising going forward. That includes the GOP’s tax bill that was recently signed by President Trump. It also includes the Save Local Businesses Act, which is aimed at overturning the National Labor Relations Board’s joint employer ruling that says franchisors are potentially liable for law violations that are done on the franchisee level. The bill has already passed in the House, however, the Senate has yet to unveil its own version of the bill.
“Of course, tax reform is some of the biggest news in the franchising industry right now,” Helgerson said. “The Save Local Business Act is also going to be interesting to follow. It passed in the House, and we’re still not sure what will happen in the Senate, but there’s no doubt that it’s going to have some type of an impact in 2018 for franchisors.”
Government-related issues aren’t the only factors poised to change the course of the franchising industry in 2018. Helgerson predicts that the industry is shifting toward more experienced multi-unit owners, which will impact the way that brands close deals.
“Outside of the government and legislative issues, I think multi-unit growth is going to be something that continues to gain momentum. This is a movement that started a few years back—more and more brands are embracing multi-unit owners, and they’re paying attention to the tools, training and support that they need in order to support that type of growth,” said Helgerson. “There’s no question that larger franchises are acquiring other concepts, and they’re starting to see large multi-unit operators enter their systems. It’s interesting to see owners who have traditionally focused on food now breaking into other segments like retail—diversity in holdings is continuing to grow. It’s minimizing risk—particularly in the food sector right now. It makes sense to move into other areas to see better returns. But brands are going to need to have a strong Item 19 in their FDD to attract these types of owners.”
1851 Chief Development Strategist Sean Fitzgerald notes that the economy is also going to play a key role in the franchising industry in 2018. As the economy continues to improve, fewer executives and corporate workers will be leaving their careers behind to start businesses of their own. That means that while brands with larger investments will experience improved franchisee satisfaction, it will be more difficult for them to recruit new owners.
“High income individuals aren’t going to be looking to take a risk next year because they’re already doing well with the stock market. That’s going to present a challenge for large investment, brick and mortar concepts—it’ll be increasingly difficult to get new franchisees on board,” said Fitzgerald. “What we’re starting to see now is the rise of simple and low investment businesses. Service-oriented brands are expected to do well because more entrepreneurs are going to be willing to start that kind of business on the side.”
Despite the challenges facing the franchising industry, the overall outlook for 2018 is positive. While there are still some major factors up in the air, experts are anticipating growth in the months ahead.
“Overall, I think we’re going to see the growth that we’ve experienced in 2017 carry over into the new year. Access to capital seems to be getting better, and the economic forecast is reasonable despite all of the natural disasters that we experienced this year in California, Texas, Florida and Puerto Rico,” said Helgerson. “When you couple that with an improved regulatory environment, the outlook on the industry is optimistic. Barring any sort of catastrophe, I think that 2018 is going to be a great year for franchising.”