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Franchise Community Begs for Positive Government Action

Business at Franchised Hotels Forecast to Hold Steady in 2013

If—and it’s a big if—Congress avoids pushing the economy over the fiscal cliff, franchised businesses, including hotels, will continue to grow next year, although at a slightly slower pace than in 2012. The franchised sector of the economy would do even better if Washington provides real leadership on the multiple challenges facing the economy, say leaders of the International Franchise Association.

The message that government needs to produce significant, positive change was the strong underlying theme at an IFA press briefing yesterday. The good news from the group was the number of franchised businesses in the U.S. will increase by 1.4% next year, and revenues should jump by 4.3%. Direct employment in franchised businesses will increase by 2.0%. The lodging sector of franchising will see similar growth next year, with the number of units to rise by 1.5% to 25,911, revenues to increase by 4.2%, and employment to go up 0.9%.

“While the forecast for 2013 is sobering in the sense that we’re not growing at levels we’re capable of and what you would normally see at this stage of the cycle, I am optimistic for the franchise sector, and for lodging in particular, given that we continue to outpace the growth of non-franchised businesses and continue to recover from what was a very bad couple of years,” said Choice Hotels President & CEO Steve Joyce during the briefing. Joyce is an IFA board member and assumes chairmanship of the group in 2014. “One of our biggest concerns is inaction in Washington. Franchised companies are poised and ready for growth, but they’re standing by waiting to see what our economic policies will be. Everybody wants to grow and hire, but you can’t be a responsible business leader if you don’t know what the rules are going to be.”

Joyce said Congress needs to pass pro-growth legislation that encourages franchised businesses to invest because “that’s where the job creation is going to occur. Franchising remains the best business model for entrepreneurs and, despite the headwinds we face, we will welcome thousands of new franchisees in 2013 across all the business sectors, and that will create jobs.”

Issues aside, owners of franchised businesses remain generally optimistic, according to the IFA’s annual business leader survey it conducted in November. More than 80% of those surveyed said they plan to increase the number of units they own, and 29% said they plan to increase the number by 6% or more.

Yet these owners are particularly concerned about tax policy, because as IFA President & CEO Steve Caldeira explained most of them (about 80% of IFA members) operate their businesses as pass-through entities and file their taxes as LLCs, partnerships, S-corps or sole proprietorships. As such, they don’t pay corporate income taxes but declare their profits on their personal tax returns, making them susceptible to increases in tax rates, especially for those in upper-income brackets. As usual, the colorful Joyce had a more real-world (and lodging-centric) explanation of the issue:

“A lot of our franchisees own three or four hotels and may be at the $300,000 to $400,000 [annual] income level. There is this presumption in Washington that this allows them to live on a beach, drinking Bordeaux wine and smoking cigars. The reality is a hotel is capital intensive, so they’ve go to put away $50,000 to $100,000 into the hotel every year to keep it running and every five to 10 years they’ve got to put in another $400,000, and if they want to build another hotel they’ve got to save a million dollars in equity.

“These folks aren’t taking home a lot of money. They’re plowing it back into their businesses and building new hotels, which puts people to work.”

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