Franchise prospects looking up as CGT canned

Franchise growth prospects are expected to improve following the announcement that the Coalition Government will not be introducing a Capital Gains Tax.

The original report from the Tax Working Group proposed that profits from sale of appreciating assets such as businesses, intellectual property, shares and land investment property would be subject to tax. Such a tax would potentially have hit small business badly, as the potential for capital gain from starting or building a business can be a prime motivator. This applies especially to greenfields franchises, where franchisees take on new locations from scratch.

Uncertainty over the tax plans has been a contributor to low business confidence since the last election, which has also affected franchise recruitment and growth. With this removed, it is now hoped that existing and future business owners can now plan for the future with more confidence.

Reaction from the franchise sector

Nick Stevens, Senior Business Broker at Link Ellerslie, says, ‘We are about to see huge numbers of businesses coming to the market as the baby boomers (1946 to 1964) are looking to retire. These business owners have worked hard for many years making huge sacrifices working long hours to build profitable businesses that they could sell and reap the rewards of this hard work in their retirement years.

‘It’s excellent news for all business owners and, of course, franchisors and franchisees that the CGT will not be going ahead. We have seen a real nervousness around this from both vendors and purchasers, especially on how it was going to be calculated and the introduction time-line.’

Dream Doors franchisor Derek Lilly agrees, saying, ‘The business and housing sector had taken a brief pause or slow-down in recent months. This in my opinion was a direct result of investors/people holding off buying franchises, houses and businesses, because of the likely implications of Capital Gains Tax. The total amount of money is interlinked in many more ways than you may think in the economy. I am now personally hoping for a resurgence in franchise applications as a direct result of the Government’s actions.’ 

From the hospitality sector, Peter Webster of Columbus Coffee says, ‘My view is that no CGT is a good thing. I am sure a number of potential buyers would have been holding back, concerned that they would be better keeping money invested in their personal home than taking the risk of investing in a small business that could then cost them in tax at the time of sale. Building a business and increasing its value with no CGT is preferable to doing the same then losing a chunk of value at sale to the IRD – especially as the threat included no indexing of initial value.’

Specialist franchise accountant Philip Morrison, who outlined the potential impact of a CGT on franchising in this article, says that fears that the government was out of touch with the business sector and doubts about their governance of the economy had caused high anxiety levels for many, with a resulting lack of confidence around business decisions.  ‘I think that made a dent, but things are more steady now.’

It’s also worth noting that economists are predicting the economy to start growing again mid-year, which may further increase confidence.

 

 

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