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The Next Gen Transition: How McDonald’s Franchisees Can Save Taxes and Maintain Cash Flow

Posted by Steve Bickert on Tue, Nov 8, 2016

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BLOG_-_Next_Gen_Tips_-_5-2016.jpgWhen McDonald’s Owner/Operators consider retirement – especially if there is a Next Gen involved – it is advantageous to begin the process as early as possible.

The longer the time frame, the more options you have. Selling or gifting the entire business all in one year can result in unnecessary tax implications. If you have the ability to transfer over the course of time, you are provided with many more options.

We’ve been advising McDonald’s Owner/Operators on Next Gen transitions for decades, and have well-tested strategies to make the transition as easy – and as profitable – as possible.

Check out these tips on ensuring a successful transition:

Maintaining Ratios: When a Next Gen is a part of your overall exit strategy, it is important to make sure your organization is in compliance with McDonald’s ratios both before and after the transition. It is important to devise a transition plan that both satisfies the needs of the First Gen while making sure the Next Gen organization remains in compliance. Remaining in compliance throughout the transition will require planning.

Concannon Miller's Next Gen Academy for Finance & LeadershipTax-saving Strategies: If you have time on your side, there are several strategies that can be employed:

  • Special Trusts: There are two trust strategies that can be used to transfer ownership to the next generation while freezing the value of the equity and providing the First Gen with annual annuity payments over the term of the trust.
    Establishing a Grantor Retained Annuity Trust (GRAT) or an Intentionally Defective Grantor Trust (IDGT) generally has no gift tax implications and the First Gen picks up the income on their personal tax return for that ownership interest, just as they did previously. When the GRAT or IDGT expire, the ownership interest transfers to the Next Gen tax free.
  • Gifting: If gifting is a part of your plan – whether you plan to gift some or all of your ownership interest – you have the option to gift smaller amounts annually to utilize your annual gift tax exclusion of $14,000. If married, you can also split the annual gift with your spouse, thus increasing the amount to $28,000 annually that can be gifted without affecting your lifetime exclusion.
  • Installment sale: An installment sale plan is an option that many operators utilize to transfer an interest. This provides a revenue stream for the First Gen while eliminating the need for outside financing. It also provides the Next Gen with some flexibility.


Required Reinvestments:
Often times in order to transition to the Next Gen, there are required reinvestments as the transition is treated just like a restaurant sale. As such, the costs can range from the National Restaurant Building and Equipment Standards requirements, a MRP, or even a rebuild of the restaurant. Thus, there is a decision to be made as to when the reinvestments should be completed – before the transition or after. In either scenario, these required reinvestments will affect the overall value of the restaurant(s) and thus the buyout.

Generating First Gen Cash Flow: There are two additional items to consider that can generate additional annual cash flow for the First Gen. If the Next Gen is not in a position to purchase all of the interest in the entity, the First Gen could maintain a minority interest that can be purchased at a later point in time. This could generate a small amount of recurring income for the First Gen. However, the current entity structure needs to be considered as it may create distribution issues.

The other item to consider is whether or not the First Gen owns the office building. If so, this is an item that can generate additional annual cash flow for the First Gen which may allow for additional flexibility in the buyout plan.

Planning is key. Make sure you have a group of trusted advisors in your corner to make sure the plan is set up to minimize taxes and meet the financial needs of both generations.

Looking for more Next Gen advice? We're holding our second annual Next Gen Academy for Finance and Leadership in February. Email me at sbickert@concannonmiller.com for more information or sign up here.

Topics: McDonald's management

Concannon Miller’s unique, holistic and intimate approach to financial health sets us apart from smaller CPA firms with more limited resources as well as mega firms where mid-sized clients struggle for attention. Contact us here to talk about improving your business.

This communication is designed to provide accurate and authoritative information in regard to the subject matter covered at the time it was published. However, the general information herein is not intended to be nor should it be treated as tax, legal, or accounting advice. Additional issues could exist that would affect the tax treatment of a specific transaction and, therefore, taxpayers should seek advice from an independent tax advisor based on their particular circumstances before acting on any information presented. This information is not intended to be nor can it be used by any taxpayer for the purposes of avoiding tax penalties.

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