In addition to being a franchisee of multiple brands, including Capriotti’s Sandwich Shop, Pizza Hut, KFC and Taco Bell, David Barr leads the International Franchise Association as the 2019 Chairman. In this position, David has a broad view of the franchising industry and advocates for the organization’s members in Washington, D.C., and across the country.
He also serves on the board of directors for several franchise brands, such as BrightStar Care, TITLE Boxing Club and Capriotti’s.
We were fortunate to sit down with David and get his insights into what’s unfolding in the franchise industry, along with challenges and successes.
Q: How would you describe the current climate for franchising?
A: The current climate is good, both for franchisors as well as franchisees. Emerging franchisors are experiencing great acceptance of their goods and services, and through their differentiation are able to find prospective franchisees. The economy is healthy, lending is healthy and, therefore, franchisors are able to grow.
It’s a good time for franchisees because of the economic times. There are tailwinds, which allows for the initial investment to be recouped by franchisees. They should focus on what goods and services are unique, and how they can maximize it in their local community.
Q: What are the biggest challenges you see facing franchising this year?
A: The biggest challenges for franchisors in 2019 are what I consider societal changes.
The customer continues to want more customization and convenience. We see that in the restaurant space, specifically around third-party delivery, and it’s putting stress on the business model of many restaurant companies. But, those that adapt will grow, and those that don’t adapt will decline.
Throughout the United States there continues to be pressure on labor rates. Typically, labor rates have crept up over the years, and restaurants and other concepts accommodate them. But, in recent years, there’s been a political movement pushing a large shift in labor rates, which will create stress on certain business models. This will cause disruption in the marketplace for franchisors.
In 2019, there will be some political pressure on the franchise business model. Specifically, the joint employer ruling will continue to be an issue. In the past, direct control of an employee meant that you could hire and fire them. As a result, you were considered the employer. Under the joint employment ruling, the term “indirect control” has come up over the last few years. Unfortunately, none of us knows what that term means. So issues around indirect employer are likely going to be solved through the courts.
What does it mean if the joint employer indirect control rule is established? For the franchise model, it’s an existential threat. If indirect control is established, franchisors could be forced to negotiate union rates and union standards because they’ll be operating in a more unionized environment. For franchisors, if a franchisee was sued, then that franchisor would have liability because they had indirect control over the employee for that franchisee’s actions or activities with that employee.
However, joint employment can also be problematic as a franchisee. Many franchisees have invested large amounts of capital into systems, and did so in order to be entrepreneurs – to hire, fire and manage employees in order to operate their business model.
At IFA, we believe this confusion is a threat to franchising, one that requires education of legislators, so that we can better define direct control within joint employment.
The Federal Trade Commission (FTC) Disclosure Rule is another issue franchising is facing in 2019. The FTC has said they will review the disclosure rules between franchisors and franchisees. These are the rules that dictate the initial outreach as well as sales process to franchisees. The IFA is working hard with the FTC in order to better define how those rules will be reviewed.
Q: What are the greatest advancements in franchising over the last year?
A: Over the last year, the greatest advancements in franchising have been addressing challenges that have come out of regulatory bodies in Washington, D.C.
The Financial Accounting Standards Board, or FASB, had issued some promulgations and guidance that would change revenue recognition for initial franchise fees. That was going to be problematic to many emerging franchisors. The leadership at the IFA was able to meet with FASB and explain how this would impact the franchise business model. As a result, we moved from a deferral of those initial franchise fees to more immediate recognition. In other words, the actual revenue recognition from an accounting standpoint would mirror what actually occurs with the cash.
The IFA and other franchising leadership were able to address a threat and turn it into an opportunity – the income tax cuts. Many franchisors were going to be left behind on the 20 percent deduction for qualified business income. The IFA leadership was able to address that, and further pronouncement and guidance issued by the Internal Revenue Service allowed for many franchise businesses to have the deduction that others in the U.S. economy would enjoy through the tax code.
In 2019, with respect to advancements to the franchising business model, it’s been a great economic year. We’ve seen many emerging brands develop points of differentiation and sell additional franchises. They’re able to do so because credit at the moment is healthy, people can get bank financing, the Small Business Administration has been working and economic tailwinds are allowing opportunities for emerging brands to grow.