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Franchisees Fear Obamacare as Uncertainty Paralyzes Growth

October 1, 2013
URL: http://www.entrepreneur.com/article/228653

With state health insurance exchanges now open for business, President Obama's health-care law has officially kicked off. But for much of the business community, that hasn't meant an end to the confusion.

Franchisees are among the many business owners trying to make sense of the new law, freezing expansion and cutting back on full-time employees as they fear increased costs will impact their bottom lines.

In a new survey by the International Franchise Association, nearly 18 percent of franchisees ranked the Affordable Care Act as their top concern. The IFA reported that 92 percent of franchisees believe that the Affordable Care Act will increase the cost of their business operations.

"I have never talked to any business owner that has been enthusiastic about it," says Mike Bidwell, president of The Dwyer Group, a holding company for several service-based franchises including Aire Serv and Mr. Rooter. "I have never seen anything that has resulted in such a unified negative response."

Franchisees will likely be affected more intensely by increased health-care costs due to their business structure. Many traditional small businesses fall short of the 50 employees that would require them to offer health insurance. But because franchisees often operate multiple stores, their total employee count often tops that.

Meanwhile, franchisees say they don't have the same clout as big businesses do when it comes to negotiating with insurance companies. Big companies have more resources to deal with the new changes and could possibly get better rates from insurers as a result.

Additionally, franchisees are more likely to hire employees who may not typically spring for health care: low-skilled, younger individuals working variable hours or seasonally. Being required to suddenly provide health care for the bulk of these employees would be a huge shock to franchisees, many of whom are negotiating already slim profit margins.

Franchisees are not universally opposed to all aspects of the ACA. Indeed, most agree that health care reform is needed. However, the inability to get a clear answer on how Obamacare will affect franchises have left franchisees fearful and uncertain about whether their businesses will survive after the ACA is in effect.

"I've been to several seminars, through insurance companies and speaking with government bodies, and it seems that the interpretation is different depending on where in the information is coming from," says Brooke Wilson who, with her husband Les, operates Two Men and a Truck franchise units in five markets. "I know that I still have questions."

Related: Who's Hit Hardest by Obamacare?

Wilson's research had led her to believe her health insurance costs would increase by around $150,000 following the rollout of the law. However, last week her insurance advisor informed her that, taking into account Two Men and a Truck's employee base of young, healthy men and the ACA's use of a system in which all insured individuals pay the median insurance fee, the expense would be closer to $273,000, with full implementation in 2015. The discrepancy between the two numbers and the uncertainty in potential outcomes has left Wilson feeling unable to plan for the future in a productive manner.

The anxiety inherent in this inability to predict how the ACA will impact franchises is a common thread throughout the industry, whether in moving, personal care or restaurant franchises.

"The biggest impact is the fear and the frustration," says Bidwell. Bidwell believes lawmakers speed is outpacing the complexity of the act and franchisees' ability to prepare for the law's implementation. He uses the metaphor of a business attempting to launch a project or asking a loan from the bank -- it would never succeed unless the exact costs and benefits were clear. However, franchisees remain unaware on how much health care will cost in in the coming years and what far reaching repercussions the ACA may yield.

Franchises Freeze Up

The uncertainty about the health-care law has reportedly already paralyzed some franchisees' hiring and expansion plans.

"I am aware of two owners who have sold several locations simply to get under the 50-employee bar," says Dick Kauffman, a Fantastic Sams salon franchisee.

"I know of multi-unit franchisees who are selling some of their stores just so they can escape the financial clutches of Obamacare by lowering their employee count," reports David J. Ketchen, Jr., a professor at Auburn University's Raymond J. Harbert College of Business.

Decreasing employee hours and increasing part-time employees is a major tactic to temper insurance cost-increases discussed by franchisees. "I am a business owner because I want to help people," says Stephen Bienko, who operates two College Hunks Hauling Junk and Moving units. However, with the black and white delineation between part-time and full-time employment, Bienko says he and other employers will have to make decisions restricting workers' hours. Franchisees predict they will become increasingly reliant on part-time workers.

Ultimately, no matter how franchisees try to find loopholes and avoid the effects of Obamacare, most will face increased costs. Franchisees such as Mike Ruffer of Five Guys have faced backlash for threatening to raise prices due to the ACA. However, with increased costs franchisees say the money needs to come from somewhere.

"The consumers are going to pay this bill," says Ken Green, a Bruegger's Bagels franchisee who runs 33 restaurants in New York. Green currently offers health care for employees who work over 30 hours a week and, he says, spends "more on health care than on flour." However, his employees tend to be young and earn lower incomes. Many don't currently have health care or are on their families' plans. He worries that the ACA will force younger employees who don't need or want health care to join a plan. These increased costs will result, in Green's case, a pricier bagel for every customer.

"If we have an x-percent increase in our costs, whether it be in the price of the product that we buy or the wages that we pay or the benefits that are imposed upon us, those costs get passed along to the consumer," says Green. "And everybody is going to have to pass them along."

Related: Big Companies' Reactions to Health Reform