"The Master value is trust. There are no relationships that can survive for very long without it."

- Jim Amos

What Election Results Mean to the Franchise Industry

November 9th, 2012

Four concerns for small business after the election

America spoke Tuesday night. Roughly half the country thrilled at the president’s re-election, and roughly the same number found themselves disappointed. For franchising and small businesses that continue to face uncertainty on tax rates and deal with an accelerated Obamacare implementation, nothing has changed. Many Americans believe a Mitt Romney administration would have meant more business growth. What is certain is that maintaining the status quo does not change this dynamic.

Romney was endorsed by the International Franchise Association and the National Federation of Independent Business. In the wake of the Great Recession and under President Obama’s leadership, the rate of creation of small businesses with employees (as opposed to sole proprietors) has fallen to its lowest level in 35 years. In 2009, the last year for which data are available, only about 1.3 of 1,000 Americans started businesses with employees — a little more than half the rate in 1977, according to Scott Shane, chairman of the Economics Department and professor of entrepreneurial studies at Case Western Reserve University.

All of this is not Obama’s fault. The near-collapse of the financial industry created enormous challenges; the bursting of the housing bubble wiped out equity and net worth; and the resulting unemployment spike pushed down consumer confidence and demand. Over the past year, the economy seems to have settled into a slow but steady recovery. What is certain is that our country needs jobs and lots of them.

Four issues are weighing down small business owners and preventing the investments and expansion that could turbocharge the recovery and remove the barriers to job creation.

Regulation of business lending

The financial collapse was devastating to the global economy, and it induced a spasm of new regulations designed to prevent another crisis. Bank regulators in particular took a hard look at financial institutions’ ledger sheets and insisted on bigger cash cushions and less risky investments. That sounds wise, but the practical effect of the changes was to choke off small business lending — even to people who are eminently qualified.

Consider this example: In the days before the financial crisis, banks typically required 20 percent equity from someone seeking a small business loan. Often, a home equity loan was enough, and the bank would finance the balance. The arrangement helped thousands of people every year start businesses and create jobs in their communities. Someone with a proven track record of success who was seeking to expand had easy access to loans to grow their businesses.

Now, banks typically require between 40 and 50 percent equity for a new business loan — and homes have lost so much value that a home equity loan is rarely an option. Banks are now requiring entrepreneurs to bring more money to the table at the precise moment when many Americans have had their assets wiped out. It’s a tremendous barrier to economic recovery.

Why are banks doing this? Bankers have told me that the regulations have forced them to be so risk-averse, they have choked off lending. Banks want to lend, and many Americans are clamoring to start their own businesses. It’s time to correct the overreaction of regulators and free the flow of capital to new and growing businesses.

The tax code

Barack Obama and Mitt Romney’s plans for the tax code were dramatically different: Mitt Romney wanted to cut taxes to spur investment and free America’s job creators to invest more in their businesses and hire more employees.

Obama pledges to push the top federal income tax rate to 39.6 percent; tax dividends at the same rate as wages; and increase the top tax rate on capital gains to 20 percent. Obama also says he’ll raise the estate tax from 35 to 45 percent and drop the threshold for paying the tax from estates of $4 million or more to $3.5 million.

The truth is, wealthy people will be just fine no matter who is president, but the ability to grow a business and employ more people will be constrained if these new tax rates are implemented. Employers get great pleasure out of helping other Americans earn a living by delivering great services, and creating jobs is the fastest way a person can help their community.

I hope the president is open to compromising with House Republicans on some of these policies. Otherwise, I fear the economic recovery will remain slow — or stop altogether.

Obamacare

Universal health care is an admirable goal, but foisting the responsibility onto businesses is a recipe for, at best, slow job growth.

Obamacare adds regulatory costs to small businesses and creates a massive disincentive to expansion. America’s economy has always been dynamic in part because successful entrepreneurs could rapidly expand their businesses. Obamacare will force companies with more than 50 employees to either provide affordable policies or pay $2,000 fines, which will create a financial barrier to expansion for small businesses.

IFA President Steve Caldeira has said that 3.2 million jobs are at risk because of the employer mandate. The IFA also expects the law to add more than $6.4 billion in increased costs to franchise businesses, not including the cost of regulatory compliance.

With President Obama in charge for four more years, his health reform legislation will not be repealed. I hope that Congress will work tirelessly, however, to reduce the regulatory burden as much as possible.

Expand the opportunities for veterans

 

Jim Amos Veteran Franchises

Tasti D-Lite CEO Jim Amos speaks during Small Business Day on June 28 in Nashville about efforts to give veterans a route to small business ownership. Tasti D-Lite has waived 100% of franchise fees for veterans through the end of 2012.

 

One reform that I hope the president will embrace is an expansion of the G.I. Bill. The G.I. Bill helped boost this nation’s prosperity after World War II by making a college education available to service members, and that offer is still on the table for today’s returning heroes. College isn’t right for everyone, though, and it would be great to allow veterans to forge a different path by using G.I. Bill funds to start businesses.

The franchise industry would love to have more veterans in our ranks. Their discipline, focus, courage and determination are traits we look for in any franchise owner. That’s why so many franchise systems participate in the IFA’s VetFran program, which is designed to make franchises more affordable for those who have served. Another IFA program, Operation Enduring Opportunity, includes pledges from the industry to hire 80,000 veterans or their spouses by 2014. A little help from the G.I. Bill could ensure that those veterans are employers rather than simply employees — fast-tracking their ability to build the great post-military careers they deserve.

The president and I disagree on a lot of things, but I’m sure we can agree on the need to honor and help those who have served our country. G.I. Bill expansion would turn thousands of veterans into small business owners who would hire fellow Americans, allowing service members to rejuvenate our country as nobly and tirelessly as they’ve protected it abroad.

Tasti D-Lite chairman and CEO Jim Amos has more than 30 years of experience guiding successful franchise companies such as Mail Boxes Etc. He was inducted into the International Franchise Association’s Hall of Fame in February and is co-author of the newly-released book The Tasti D-Lite Way: Social Media Marketing Lessons for Building Loyalty and a Brand Customers Crave (McGraw-Hill).

3 Comments

  1. Keith Albright
    Posted November 10, 2012 at 3:45 pm | Permalink

    Interesting overview of the probable impact of President Obama’s relection on the franchise industry. However, I think it signals something else as well. There seems to have been a fundamental change in the DNA of the electorate. Where we once prized hard work and achievement, we now sneer at it and instead are more interested in how someone makes us feel and how well they understand our challenges. if that’s true, it doesn’t bode all that well for the future of franchising – where hard work, perseverence and dedication are essential to success.
    Hope I’m wrong, but that’s how it looks to me this morning.

    • jamosjr@aol.com
      Posted December 4, 2012 at 4:52 pm | Permalink

      Keith,

      Thanks for you thoughtful comment. I agree that culturally it appears we are slipping somewhat. Historically, however, these things often have a pendulum effect and I suspect there is some of that going at the moment. With that said defining deviancy down is not a productive goal for our society. I am hopeful that franchising in particular and free markets and free people will be defense enough over time in displaying the benefits of the hard work, perseverence and dedication that you say is essential to success.

      • Keith Albright
        Posted December 8, 2012 at 3:01 pm | Permalink

        Hello Jim:

        Hope you’re right and I’m wrong. While I’m still talking with prospective franchisees who seem just as interested in starting their own business as the folks I was talking to 20 years ago, that’s become a very narrow slice of the total population. Another manifestation of what I think I’m seeing is the fact that we’re losing, or maybe have lost, the language war. Since when, for example, did legitimate IRS deductions for home mortgage interest and charitable contributions become “loopholes”.

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