January 2013 Archives

Most of you and your associates probably received the first paycheck already in 2013. It is less than it was last time, right? How much less? Have you multiplied the "loss" by the number of payrolls in 2013?

Well, I just got off the phone with someone making $150,000 a year, gross. The first paycheck in 2013 is about $344 less than the last one in 2012 was. There are 26 payrolls in 2013, so it means losing thousands of dollars this year.

Why?  Because the temporary Social Security tax cut (also referred to as payroll tax cut) will not be extended for 2013. Therefore, everyone will see the Social Security withholding increase from 4.2% back to 6.2%.

In a nutshell, what does it really mean to you, a solo or small business owner?

- If you are a solo or small business owner who also made "capital infusions" or "loans" to your company, you will have less to lend.

- You have to spend wiser.

- Since other people are getting less money on their paychecks as well, they will spend less - or at least look closer before they buy goods or services. It means you have to focus on what you do best and spend more time with current and future clients.

What may be some reasonable steps to consider in 2013 bringing change to the way you do business but in a good way! Take a close look at your time management. What percentage of your time generates revenue? What are those tasks you do that would not generate revenue? Can you take them away from your list by having someone else doing them?

Would you be able to generate revenue (do you have enough clients or customers) to do revenue-generating activities if you get some or most of that time back?

If your answer to the last question was "yes", than you are looking at "delegating" work.

What type of activities are those you could take off the list? Let me guess: mostly administrative ones.

How would it be the most beneficial to delegate such work? You certainly do not want to spend more on office space or computers. You can't increase your overhead costs further by hiring a part-time full-charge office manager with full benefits to take the tasks over. But you need these tasks to be done, in a professional matter, not to mention ad-hoc tasks.

What is the easiest and most beneficial way to go from here? I recommend a consulting firm offering full-scale back-office services virtually. So you do not need to hire anyone and do not need more space to be rented. You would have your own accountant taking care of the books, who can also do the taxes and process payroll, invoice clients and customers. If you have any additional ad-hoc tasks, HR related (job advertising, background checks, ect.,), web service assistance, just to mention a few, you just pick up the phone and it is taken care of.

What does it mean to you? You are gaining more time that you can charge to clients so more revenue is generated. You have spent significantly less than what additional earnings you made to make it happen - so it was worth doing it. You are less frustrated with business administration because you do not have to worry about it.

You just promoted yourself benefiting YOU and your Clients.

My name is Sylvia Pacher, and I am always here to assist you along the way to grow your business bigger, stronger, more competitive and profitable.

The restaurant space will be interesting in 2013. Sales issues, cost issues, expansion issues, franchisee issues. There are still too many restaurants in the US and x-US markets sales increases have slowed. The two industry leaders, McDonald's (MCD) and Darden (DRI), are both somewhat in the penalty box and under pressure. Here are our thoughts on 2013 issues and opportunities.

Comps Cliff Coming: In looking at 2013, it is likely restaurants will get off to a bad start. In Q4 and Q1 2013, the restaurant space will fall off a cliff of sorts: the comps bulge generated last winter. Driven then both by warmer weather, price increases, a bit lower sales of discounted items and the peak of the 2010-2011 restaurant recovery, the January-March 2012 number will be hard to beat.

The following chains will likely have the hardest sales comp comparisons in Q1. Every single chain had lower comps most recently reported than the Q1 peak, versus the most recent quarter or monthly update:

Company/symbol FY 2012, Latest Trend 2012 Q1 Jan-March Comp
McDonald's +2.4% +7.3%
Starbucks +7.0% +9.0%
YUM (YUM(1) -6.0% +14.0%
Jack in Box (JACK) +3.1% +5.6%
Chipotle, (CMG) +4.8% +12.7%
Texas Roadhouse (TXRH) +3.6% +5.8%
Blooming Brands (BLMN) +3.6% +5.3%
Buffalo Wild Wings (BWLD) +6.0% +9.1%
Panera (PNRA) +5.8% +7.7%

(1) China Division only

More sales news. Traffic throughout the sector has eroded since fall 2012. In the QSR space generally, traffic now is very marginally positive and average check is 2-3% favorable, but in the overall casual dining space, traffic is negative and totally offsets about a 2.5% check increase. A few positive standouts exist, however: Texas Roadhous ,Panera, Starbucks (SBUXand Popeye's (AFCE).

One question is why was investor disclose so poor at YUM? The China same store sales trend is so stunningly negative - large sequential decreases from +19% in FY-11 to -6% just noted this week for Q4 2012, perhaps the largest decline anywhere over such a short time.

Extreme discounting is the newest news but is really an old story. The current price spectrum of restaurant TV ads runs from $.99 grillers at Taco Bell to $11.99 thirty piece shrimp at Red Lobster. This does not portend positive for the average check. The comps cliff has affected marketing strategies everywhere via low price marketing.

Earnings standouts: Texas RoadhousePanera, Starbucks and Popeye's were Q3 (and Q2) positive standouts: positive sales and traffic, sales and earnings beat $.01 or more over estimate. Does prior performance guarantee future results?

Dividends are the goal. Dividends will be important in a low growth, low return world. The US restaurant market is way overdeveloped and worldwide development takes time and proper store level economics. We will be glad to see companies like Dunkin Brands (DNKN,1.80% yield), Burger King (BKW,.90% yield), and Blooming Brands (BLMN, zero yield) finally work their way out of private equity positions so that more substantial dividends can be paid. THI, another pure play 100% "capital light" franchisor, is also low at 1.70%. That there are two coffee sector players in this group is interesting. Lower coffee commodity costs advantage will accrue to the franchisees, not the corporate entities.

Some IPOs and M&A will happen. We still wonder when Noodles will be ready for its IPO. Fast casual is "hot." Another fast casual brand, Pei Wei, could be a candidate once its lower newer unit open sales problem is fixed. Jamba (JMBA) seems to be of value for those strategic buyers who need an established beverage platform.

It was clear from the 2012 SBUX and DRI transactions that the path to a rich M&A valuation is to develop a unique but mainstream product that well-heeled restaurant majors can buy for entry at rich multiples. There will be continued private equity churn, they always have fresh powder to deploy. The wave of 2006-2008 PE acquisitions will soon come due to sell.

Several Turn Arounds should be watched. Interesting that the two worldwide restaurant leaders, MCD and DRI, are both challenged. No surprise that MCD went into a new product new news tempo decline as it changed CEOs in 2012. New products news yields sales.

It will be fascinating to watch Darden work out of its current tight cash position caused by lagging big brands and resulting profit shortfall, big remodeling capital expenditure (CAPEX) requirements and now debt service for its 2012 acquisitions. Of necessity, they will look for another acquisition in 2014, once its free cash flow position improves. We wonder if BKW has the worldwide AUV sales base potential anywhere except Latin America for franchisees to expand profitably.

Restaurants must more creatively test revenue and expense solutions: Restaurants can offset negative cost pressure and difficult comps pressure by looking at revenue increases beyond price increases and cost reductions beyond food portion cuts and labor hour savings. Unique store level pricing tiers and dual wage tiers to offset Obamacare are but two examples. The industry needs to test aggressively new ideas.

Defrancising v. Refranchising company strategy divergence will continue. Those who can operate restaurants well will continue to do so, those who cannot will refranchise. Panera, Texas Roadhouse and Qdoba are building new units, converting franchisees to company operation.

Franchisors still need to improve investor reporting and franchisee disclosure if they hope the franchising "capital light" business model will be sustained. How can DineEquity (DIN), now 100% franchised, be properly analyzed if there is no franchisee profitability reporting?

Is there room for optimism? Yes. Commodity cost forecasts have come in at the low end of forecasts. Some restaurants, such as Sonic (SONC), have finally sorted out their marketing focus.

Investor Recommendations. Look for a rough first half. Be ready for and go light or short the nine companies noted above that will have a negative same store sales cliff In Q1. Restaurant space investor attractiveness will be better second half 2013. Look for potential dividend upside effects at BKW, BLMN and DNKN late in 2013. DRI likely must cut its dividend so react light/short accordingly.

Restaurant sector challenges of negative same store sales comparables, consumer unease, rising food commodity costs and some magnitude of increased heath care costs emanating from Obama Care appeared in 2012. The same issues will be present in 2013.

But all is not lost. There are initiatives that can offset the negatives. Here are thoughts of what restaurants, both chain operators and independents, of all stripes, simply have to fix in 2013 operationally to meet these challenges. None of these opportunities are new news.

Restaurants have been working on reducing food and labor costs since the 1970s. It's time now to look at other areas of the P&L as well as revenue maximization beyond price increases.

Revenue enhancement related:

Unique Store level pricing: US national. zone, region or even DMA level pricing is a relic of the past, representative of a 1960s-1970s more suburban, homogenous US restaurant mindset. With development everywhere and a vastly stratified and diverse US society, why does the price in suburban Philly Bucks County PA need to be the same as in south Philly? It doesn't.

The rub comes in with massive television driven campaign single price points. YUM/Taco Bell has just rolled out its $1.49 grillers on television. Is that really the only price point that will work? Rarely does the promoted item mix exceed 20%, so 80% of the mix remains to be influenced by store level pricing. This route provides for revenue management upside and I'll have a whitepaper on this topic out soon.

New beverage and dessert options needed:

The rise in water only customers and the falloff of soda sales s is epidemic. This is very noticeable at your local Chipotle (CMG), go in and check out how many customers just get water.

But the industry is to blame, as there has been little to no change in carbonated sodas for years other than the new Coca Cola mix machines. What about: flavored waters and drinks around $1? Could a carbonated cranberry, cherry or vanilla fizzy drink be prepared with existing soda/drink/bar equipment? Yes.

Could it be sold profitably for $1? Yes, especially that is aimed at water customers who now carry zero gross profit. Smaller desserts: Jack in the Box (JACK) has recently figured that out with its $1.00 brownie bites, for example. This might not work at a Cheesecake Factory (CAKE), with a $7 flagship dessert that is split anyway, but it could work in other concepts.

Suggestive sell/upsell:

In almost every restaurant type, but especially in chain operations, the order taker generally ends the transaction by asking "would you like anything else? This happens in QSR, fast casual and casual dining operations. Ban the phrase "anything else", and replace it with...."apple pie?" (for QSRs) or "glass of wine?" (for casual dining operators). Bar operators have it covered with..."would you like another", and is often used. The trick is to get new customers.

Cost Containment related:

Obama Care Health Care impact: adapt, stop whining. It's here. The estimates from McDonalds, Wendy's, Dominos, CKE restaurants and the like are in the $15,000 to $20,000 additional expense per store zone. Papa John's was the high outlier, up to $100K per store.

Perhaps John was on a carbo high when he mentioned that. Of course, small pizzerias and huge casual dining restaurants will have different costs per unit. The effect will vary based on many other factors. Test something.

We wonder if a two track wage scale might work: one higher base wage for no benefits due, or a lower wage for where payable. To foil the invariable Fair Labor Standards Act (FLSA, 1938) challenge (The FLSA does allow for differential wages for medical so long as it isn't workers comp medical expense involved), sweeten the pot for the lower wage tier employees that they get first dibs to higher hours and overtime since they are covered and won't affect the 30 hours/week calculation.

Or what about a registry to share employees to keep employees engaged and working but under the hours threshold? I've have an additional whitepaper on this later.

We've mentioned before restaurant utility costs, especially electricity (too few HVAC thermostats and overly cooled dining rooms (since kitchens are hot all day) Could not a second rooftop AC unit and thermostat be added for the front of house that would be amortized quickly? Utility company experts say the payback could be less than two years.

Stop discrimination and avoid legal costs:

It's amazing the number of chain restaurant operators, franchisees and independent restaurants that get caught in EEOC/Title 7 discrimination situations. Two multi-unit franchises (BKW, PNRA) in December 2012 alone. Big settlements, big legal costs, diversion of management time and attention.

The federal anti-discrimination laws have been on the books since 1965, and the Fair Labor Standards Act has been on the books since 1938. Management must enforce fair and equal treatment of all customers and employees.

For every dollar in legal costs, twice as many restaurant sales dollars must be generated just to offset the direct cost.

I frequently get questions related to advertising. So, I began to look more keenly at the advertisements around me. I wanted to find examples of things to do and not to do.

Testimonials and Puffery

I found this advertisement in my local paper. This provides a good specimen for my first two dos and don'ts.

dental.jpg
1. Don't use absolutes. This ad touts that dental implants are: "The BEST Solution for Slipping Uncomfortable Dentures..." I am an attorney not a dentist, but really the BEST (the word 'best' is in all caps in the advertisement).

Aren't there other solutions out there? Is a dental implant really the best solution?

The advertisement goes on to say: "We offer the Best Solution for your Budget (this time the word 'best' is not in all caps; however, you see some random capitalizations that even an attorney would not ascribe). Again is it really the Best for my budget? Doesn't Dr. Jones down the way offer comparable pricing and installment payments?

Don't use absolutes in your advertisements! There is always an expectation. There is always someone else that offers something akin and argumentably equal or better to what you are offering.

2. Do get permission before your print. I don't know about you, but if I were G.L., I would want the good doctor to ask before he printed: "I couldn't wear my lower denture at all. I didn't want to go out in public. Dr..... placed some implants in one operation and gave me immediate temporary teeth. I can eat apples corn on the cob & smile with confidence. It changed my life."

Do get permission before you print testimonials! The speaker would be most thankful and the law requires it.

Print the Facts and Protect Your Rights

I found this advertisement in the August 2012 issue of Popular Science. This provides a good specimen for two more dos and don'ts.

honda1.jpg

3. Don't print unless you can point to it. It you are going to make a claim, make sure that there is evidence that you can point at to backup your claim. And, if it is an advertisement for prospective franchisees, make sure you point to something in the FDD or franchise disclosure document.

American Honda Motor Company in its ad for the Accord says that "J.D. Power and Associates has named the Honda Accord 'Highest Ranked Midsize car in Initial Quality.'" At the bottom of the ad in fine print (fine print-we will get to that) it cites an Initial Quality Study conducted by J.D. Power.

Don't print it unless you can point to the facts! If you are going to make a claim, make sure you can point to the facts to backup your claim.

4. Declare your rights. On the very bottom of the advertisement notice you will find the ©2011 American Honda Motor Co., Inc. This stakes American Honda Motor Company's copyright to this advertisement. It says that the advertisement is American Honda Motor Company's original work of art and no one is allowed to copy it. And, yes that is the proper copyright format. The © symbol, the date, your company name.

In this electronic copy and paste world, it is more important than ever to include a copyright notation at the bottom of your advertisement. Oh and while you are at it, include the other symbols: registered trademark®, service mark℠ and trademark™.

Declare your rights! In this electronic copy and paste world, it is more important than ever to include registered trademark®, service mark℠, copyright© and trademark™ symbols in your advertisement.

Be Transparent

I found this tag on a shirt that I recently purchased for myself. It is a good specimen for my last dos and don'ts.

weaver.jpg

5. Do skip the fine print. It is all about transparency. Transparency is in. Transparency in pricing, transparency in government is all good. If you include a lot of small fine print at the bottom of your advertisements it looks like an advertisement for Viagra or that that your product comes with a lot of hidden terms and conditions.

Instead of in fine print saying that my newly purchased shirt, after one washing would be faded and discolored, the tag nicely explained to me: "We produced this garment with considerable help from the wearers, printers, & embroiderers whose handwork made this style unusual and exclusive . This hand woven and embroidered fabric may result in slight weaving and shade variations, thereby giving it a unique character all its own. Enjoy!

Do skip the fine print! There is a way to say everything. Say it without the traditional fine print legalese. Make everything you say a selling point.

Legal Disclaimer: All advertisements are used under the fair use exception of copyright laws. I have not been a recipient of dental implants, me nor anyone in my household owns a Honda, and no animals, to my knowledge, were harmed in the making of my shirt.

If you're considering funding a startup or franchise, then you may already be ready for the huge gamble of turning a 401(k) into capital investment for a business: potentially losing the retirement account altogether. But are you committed?

The method described above -- called a Rollover as Business Startup (ROBS) -- injects capital into a business from your 401(k) account. Part of the Employee Retirement Income Security Act of 1974 (ERISA), the ROBS has been popular for years.

robs-graphic-cropped.png

The potential payoff is tantalizing, which is why so many aspiring entrepreneurs are willing to put all their chips on the table. Unfortunately, few realize just how difficult it is claw those chips back if they're dealt a bad hand.

A mishandled ROBS is fraught with tax pitfalls. What's more, the mere act of initiating a ROBS may draw unwanted attention: this type of capital investment is immediately suspicious in the eyes of the IRS. And then you remember that it's your retirement you're betting.

That retirement risk brought a longtime business client of mine to my door seeking help to unwind his ROBS. After struggling with the ROBS' administrative hassle (which is often underestimated), the reality that his entire financial future was dependent on a new business in a sputtering economy was just too much.

If you're feeling the heat from a ROBS that you might want to unwind, remember that our door is always open. We'll talk you through the issues and get you where you want to go. If you're not sure, call us anyway and we'll connect you to one of the clients who we've helped out of this ERISA nightmare. They'll show you the path down from the cliff.

Before signing off, I'll leave you with some background on the ROBS, pulled from a 2009 small business guide that my clients have found helpful.

Let's start with ROBS 101

ROBS: For the investor in need of a green thumb.

ROBS plans are touted by business brokers and franchise sellers all over the Internet and arranged by investment firms specializing in capital investment.

ROBS firms charge a fee to walk clients through the process of creating a C corporation. The new corporation starts its own 401(k) plan or profit sharing plan, which must offer employees the option to purchase stock in the company. The new business owner then rolls over funds from an existing 401(k) into the newly created corporation's plan.

Because the assets are moved from one tax-exempt vehicle to another, business owners avoid taxes and penalties.

The sole participant in the plan (e.g., the owner of a new company) can then direct the investment of the 401(k) account balance into a purchase of employer stock in the new corporation. The transferred funds are used to either purchase a franchise or fund the new business -- essentially creating tax-free working capital.

But is it too good to be true?

A ROBS may be legal, but it operates in a grey area of IRS codes and regulations. To keep a ROBS transaction legal, the business owner must heed a slew of IRS regulations and avoid making certain prohibited transactions. The penalties for not complying with the rules are staggering.

For example, if the IRS determines the deal is a prohibited transaction, it can trigger excise taxes. If you run afoul of these prohibited transactions, you can run up 110 percent -- or more -- in penalties.

ROBS deals must be done very carefully and no two cases are exactly the same. This is not something to try with internet software or any law firm that simply "prepares documents at your specific direction," as they say. You want an attorney who is well-versed in ERISA law before venturing into any ROBS deals.

It can also become expensive money. Clients who have used these usually need to hire a "plan administrator", someone to be sure that all I's are dotted and T's crossed. That is an ongoing fee. It also could complicate recruitment of new talent. Anyone added to the payroll has to be given the right to access to the profit sharing plan. Remember: it was funded with your money.

So what does the IRS think?

A memo issued by the IRS on Oct. 1, 2008, appears to cast a chill on the ROBS strategy. The 13-page memo concludes that:

"ROBS transactions may violate the law in several regards. First this scheme might create a prohibited transaction between the plan and its sponsor. . . . Additionally this scheme may not satisfy the benefits, rights and features requirement of the Regulations. . . . For this reason employee plans specialists are directed to open ROBS cases as described herein."

The IRS looks closely at each case for different things, such as to make sure companies that use ROBS funding offer stock ownership to all employees of the business. Failure for that to happen would violate nondiscrimination rules.

Another red flag is when the rollover amount equals the business' stock value. Such math, in the view of the IRS, usually indicates the rollover's intent is to be used as business seed money only, rather than to be used as a bona fide employee retirement vehicle.

ROBS proponents insist that rollovers performed by reputable companies operate under IRS guidelines and will not raise agency suspicions. In any case, ROBS is not a strategy to be taken lightly. It requires careful thought and scrutiny because you're putting your retirement plan at risk. It also takes work to get out.

As always, good luck, good hunting and call us if you need us.

In Pekin Ins. Co. v. Equilon Enters. LLC, 2012 IL App (1st) 111529; the court held that the additional insured was owed a defense under an endorsement limiting coverage to claims of vicarious liability, where the complaint alleged a "possibility" that the additional insured could be found liable, even solely, as a result of the acts or omissions of the named insured. 

In Pekin Insurance Company v. Equilon Enterprises, a customer at a Shell gas station was injured in an explosion that resulted from lighting a cigarette.  The customer filed a lawsuit asserting separate claims of negligence against the gas station and franchisor. 

The alleged acts of negligence were identical and each count alleged that the party against whom the count was asserted "owned, operated and controlled the premises." 

Franchise agreements between the gas station and franchisor imposed a duty on the gas station to name the franchisor as an additional insured under the gas station's liability policy.

Pekin, in its complaint for declaratory judgment, argued that the insurance policy at issue named the franchisor in two additional insured endorsements, one which limited coverage to negligence in the granting of a franchise, and the other limiting coverage to claims of vicarious liability. 

Initially, Pekin argued that only the first endorsement applied and limited coverage to claims of negligence in the granting of a franchise.  Unsurprisingly, the court held that where there are two endorsements, each of which purported to provide coverage, an insurer cannot argue that only one controls, for that would "render meaningless the coverage provided by the second endorsement."

As to coverage for vicarious liability, the court first distinguished cases where the additional insured was covered only to the extent that liability was incurred "solely" as a result of some act or omission of the named insured.  The court then reminded that it was Pekin's duty to demonstrate that the allegations in the underlying complaint did not potentially fall within coverage, and, that it had failed to do so because there was a "possibility" that the franchisor could be found liable, even solely, as a result of the acts or omissions of the gas station. 

The court ended by noting that the two endorsements, when read together, were ambiguous as one provided coverage for the negligent act of the franchisor, while the other, in the words of Pekin, limited coverage to the negligence of the gas station and not of the franchisor.

Concurring, Justice Gordon noted that the case was even more easily decided on the fact that the underlying complaint alleged that the franchisor "owned, operated and controlled the premises." 

Control being the "key element" of vicarious liability, Justice Gordon noted that the underlying complaint expressly alleged vicarious liability, bringing the franchisor within coverage under the second endorsement.

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This page is an archive of entries from January 2013 listed from newest to oldest.

December 2012 is the previous archive.

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