June 2013 Archives

For over a decade the Fast Casual and Quick Service Restaurant industry has debated extending hours of operation.  

The advantages of staying open later are to cater to the nocturnal crowd that work and play during the wee hours of the night and to gain a competitive advantage in the marketplace.  Many locations extended closing time by an hour or two while others ventured into the arena of staying open 24 hours.

The unknowns were how to generate sales to cover labor and operational expenses and make a profit, and effectively educating the public on the open later concept.  

If locations were staying open 24 hours, another issue was to effectively and efficiently close out sales for the day and prepare for the opening of the next day's business while keeping track of sales during the transition time. 

Claims to Rescind Extended Hours

There have been varying levels of success in extending late night hours. Some corporate mandated extended hours have come under the scrutiny of franchisees.  Labor costs and security and safety of employees working the late night shifts have been cited as reasons to rescind extended hours.  Both are certainly valid reasons.  

Profitability is always a key issue in determining hours of operation.  Citing the security and safety of employees - who can argue with that?  

Loss/Crime Prevention Considerations

Late night operations are particularly challenging.  Adequate staffing can be a problem, and dealing with an increase in "drunks and punks" is particularly unpleasant.  

Let's look at the issues from a security, safety and loss prevention perspective, which unfortunately, is frequently left out of the equation in the decision to extend or cut back on the hours of operation. 

Analyzing Profitability

In analyzing the profitability of extended hours, the handling of cash, counting of deposits, securing funds, auditing of cashier performance including average check, no sales, price reductions, under ringing, and the security of the back door are important factors - as important as transaction counts and sales.  

The supervision of employees must be strong.  Many times the younger, less experienced managers run the late and overnight shifts. Profitability may be adversely affected by internal cash and food thefts, undocumented waste, lesser food quality, and poor customer service.  The overnight shift may not be as effective and efficient as other day segments. 

The late night operations must be routinely reviewed to make certain that sales are rung properly, and managers are upholding the highest standards of employee conduct and food quality.  Monitoring and managing these components may increase profitability during late night hours.

Employee Safety Concerns

The two hours before closing is the "critical period' in robbery prevention. Extending late night hours requires increased efforts in effective security policies and procedures, background checks of applicants, handling cash and deposits, drive-thru window and perimeter door control, entering and exiting the building according to best practices and trash removal. 

Formal training classes should be conducted to educate managers and late night crews in dealing with conflict, cash management, crime prevention, and proper robbery response.  Without this due diligence for those working the late night shifts, the increased vulnerability to crime is not fair to them. 

Claiming that employees working late into the night are in more danger at 2 AM than at 10 PM, while hiring crew with violent criminal pasts, no back door security, poor supervision and providing no training on what to do in the event of a robbery or how to enter or exit safely is a disservice.  The employees are more vulnerable in these conditions, no matter what time of day or night it is.

Validating the Issues

So, the extended hours debate rages on.  Can locations afford it or not? Those questions may be more easily answered with careful analysis and review of late night operations.  Sales are not likely to reach desired results simply by adding hours to the closing time on the hours of operation sign. Are employees exposed to more danger in the extended hours' time frame? 

Maybe - maybe not.  Police reports, analysis and anecdotal information of violent crime in the area occurring during late night may substantiate the claim.  

Playing to emotions by claiming increased danger is not valid without empirical information to support it.  In locations open 24 hours, instituting proper security and safety measures may even make the employees less vulnerable to robbery and other violent crime.

Make your claim in whether to extend late night hours or cut back on them, but do so with accompanying investigation beyond sales and transaction counts.  

Make certain that security and safety policies are in place and the staff is trained in crime prevention procedures.  A thorough analysis will make your decision more relevant.

When it comes time to sell a business bad practices become costly.

The general rule of thumb is that a business is valued at three times income or one time sales then adjusted according to circumstances.  While this appears to be a clean and simple method of valuing and selling a business it is unrealistic based on my experience and, I suspect, those who have successfully sold or assisted in the sale of a business. 

At the most basic level, why should the potential buyer of a business actually believe that the seller is providing realistic and reliable information?

How does one get around this tendency to mistrust the other party in such a transaction?

Selling a business involves a high degree of trust between buyer and seller.  A seller must provide information (particularly financials) that are real, indicative of the business and presented in a manner that exudes confidence.  A potential buyer of the business must be trusted not to use confidential information provided to them to damage the business. 

Mutual trust requires a level of compromise and openness that is not easily given.  It is necessary to the successful sale of a small business.  Overcoming this hurdle is the responsibility of the seller of a business.  It typically involves preparing for the sale of the business at least three years in advance to ensure that financials (a key component of achieving this trust) are ready for disclosure at the time of sale.

I was recently involved with two businesses where this trust was compromised.  Failure to obtain this trust resulted in early termination of negotiations for the sale of each business.

In one instance, the business lacked even the most rudimentary Profit & Loss Statement.  They provided two years of revenue by month and "estimated" the cost of goods sold as a standard percent of sales.  There was no reference to operating costs - a complete lack of even the most rudimentary accounting systems. 

A prospective purchaser of the business had no understanding of the profitability or operations of this business.  While the business was may have been profitable, lack of reasonable disclosure made this difficult to determine.   

This sale failed to due to a lack of disclosure.

The situation of the second business was quite different.  It had extremely effective management control and accounting systems.  The owner provided a comprehensive set of financials that allowed a prospective buyer to fully understand the business.  Unfortunately, the business was unprofitable.  To compensate, the seller provided a "normalized" set of financials that showed what a new owner could earn. 

This seller was relying on a level of trust that enabled a prospective buyer to purchase based on potential rather than actual results.  Perhaps this was considered necessary in order to justify the desired selling price. 

Nevertheless, the necessary trust between both parties was never established.  Discussions on the sale of the business were terminated.

Many business owners consider management control systems are an unnecessary expenditure.  Perhaps this is because they do not understand how to use the information gleaned from these systems to improve their business. 

This approach may increase short term profitability but at what cost?  The success of any business is determined by its profitability and a lack of adequate management insight is a serious liability.  When this same business is for sale and exposed to a potential buyer, a lack of management insight is likely to result in a reduced valuation by an outside party.  Perhaps this is why many owner operated businesses fail to survive to a second generation of ownership.

Investing in good management control systems is the foundation upon which successful businesses are built and maintained.  Maximizing the valuation of a business is important to the owner selling the business. 

It is only through effective management control systems that this value can be determined and reliably documented when the business is put up for sale.

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A rising tide lifts all ships: Consumer discretionary stocks are doing well, leading the pack with the highest forward PEs in May, as FactSet reported last week.

Same store sales: Despite some same store sales headwinds caused by the so called 2013 same store sales cliff, the theme noted early this year that sales comps would be down versus mild winter weather in 2012, the industry is doing fine. There are no large publicly traded restaurant companies in real trouble, although one could argue Ruby Tuesday (RT) is, but not any of the major players from a liquidity or default basis.

The industry was at +2.5% SSS (per MillerPulse) in May, almost all driven by ticket. McDonald's (MCD) May sales gains reported Monday were foreseen and no surprise. Yum's (YUM) -19% May China same store sales decline was not moderate but met the Consensus Matrix number.

With many non-casual dining brands, the two year and five year comps trends are solid; if that was the Street metric we'd all be celebrating. 

Forward PEs and Earnings Standouts: FACTSET noted Chipotle (CMG) (31.1X), Starbucks (SBUX), (25.3X) and YUM ($21.2X) have the three highest restaurant forward PEs in the consumer discretionary space.

Only one of these (SBUX) showed upon my list of earnings standouts, restaurant companies that have all of the following fundamentals going the right direction:

· Positive same store sales and traffic, both, with no major geographies negative.

· Meets or beats on revenue consensus, beats EPS by $.01 or more, with no downgrades within 90 days.

· Positive sequential momentum, early peek SSS current period, if revealed, positive.

· No gimmicks with adjusted, proforma or restated EPS values, and as validated by the operating income beat. A publicly traded track record of one year.

YUM has refranchised so much it's a China story. CMG is a nosebleed story.

Standouts: SBUX, with new product new news every quarter, the only restaurant chain growing traffic at a greater rate than average check. Also, Ruth Chris (RUTH), Texas Roadhouse (TXRH) Domino's (DPZ) and Popeye's (AFCE) are on the standouts list.

Both Ruth Chris and Mitchell's in the RUTH house are moving, ahead smartly.

AFCE is building company stores, capturing U.S. KFC units and reflagging them, and touting its US stores franchisee 20% EBITDAR margins, in addition to new flavors/new product news.  AFCE was the first franchisor ever to report franchisee profitability in a quarterly call that I can recall.

Investor Implications: My number one concern going forward is that the industry not shoot itself in the foot via over discounting.

NPD noted that after a time, customers see discounted prices as the new normal.

Restaurants that don't play in the ever discounting spiral space are at an advantage. Think: Del Frisco (DFRG), Cheesecake Factory (CAKE), Panera (PNRA) and CMG. Also: the noted Earnings Standouts group above, are fundamentally attractive.

Restaurant marketing tends to be copycat in nature, and like a battleship, takes forever to turn. Darden (DRI) has reset to the $12.99 television price point, doing Red Lobster and Olive Garden $3/$4 off coupons too. US Pizza Hut is doing $5.55 anniversary pizza price (one large) undercutting even Domino's and weaker QSR players are at or under the "my $.99" at Wendy's (WEN).

We wonder what customers must think of the long term pounding on price. NPD presented five year data that shows that restaurant deal sales mix is flat and declining. This means more discounting is chasing even fewer deal consumers.

In the last post we expressed the importance of operations/training manuals and how they make the life of an entrepreneur so much simpler. The idea is to build a 'smart' scalable business, one that doesn't crumble under its own weight as it grows. A well thought-out training manual is all the more crucial when you're running a franchise. 

Do you use Video Training Manuals yet?

So why use a video operations manual?

To put it simply, video works.

While videos are a staple in the marketing arena, the smart entrepreneur, especially one running a franchise, considers trainees to be an audience.

So what if you're paying them to work and go through the training? Do you think they get up in the morning thrilled about learning the procedures and protocol you have in store for them? Probably not.

But if you're running a small business (in which case hi!), you will have to essentially depend on the medium of training to ensure the best learning experience for the trainees.

video training manual offers a plethora of benefits that translate into the higher efficiency of your franchise.

Here are 7 qualities of a video training manual that you shouldn't miss out on:

  1. Flexible. People can watch and learn at their own pace. This is especially useful if it suits your training methods.
  2. Engaging. For every reader you can find thousands of watchers. Video is a proven method of attracting and holding the attention of the audience. Professionals under training are no exception to video's charm.
  3. Expressive. A video operations manual can explain a process with a clarity that written one simply cannot. This is true regardless of how sophisticated the process/task is.
  4. Speed. You can teach a whole lot more procedures etc. through a video in the same time it would take the professional/trainee to read about it.
  5. Uniform. While a personal instructor's live performance may differ from one training session to the other, video remains the same, every time.
  6. Friendly. Videos are more accessible than books. As such, a video operations manual can even help people overcome any reservations or fear they may have related to a certain task.
  7. Affordable. You can video tape your training materials with your smart phone or video camera and upload them into YouTube or Vimeo.  Then embed those videos into your procedures and voila!

Needless to say, but we'll say it any way, all of the above translate into your ability to run smooth and successful franchise operations.

Wouldn't it be great to spend more of your time on the fun stuff in your business? The work you are uniquely gifted to do? The work that can help you increase sales, improve profitability, and grow your business into your dream of success and pride?

That's one of the key challenges we all face running a business.

We have to carve out enough time to focus on the things that matter most. We have to figure out how to focus on the things that will really move the success needle... the things that only we can do to create exciting results and dramatic improvement.

One of the obstacles in your way is the struggle... and the doubt... and the hesitancy that sets in when you are worried about your cash flow. It's a HUGE distraction.

The interesting thing I have noticed in my 28 years as an accountant and CPA is that much of that worry and struggle results from a lack of understanding about your cash flow. It's not necessarily a real cash problem.

It's that uneasy, "wake up in the middle of the night in a cold sweat", kind of feeling that is rooted in not understanding what happened to your cash last month. And not knowing how to quickly, and easily, take control of your cash flow.

There's a good chance you are in the worried category if you can't pass what I like to call The Spouse Test.

What if your spouse asked you "Honey, I noticed the business had $75,000 at the beginning of the month but only $45,000 at the end of the month. What happened to the cash?"

Your ability to answer that simple question tells you whether you understand your cash flow or not.

Profit or Loss Does Not Equal Cash Flow - I'll Prove It

Do this quick test to see if you can pass The Spouse Test.

  1. Grab your income statement (Profit & Loss statement - your P&L) for a recent month and look at your net income number (your profit or loss). Write that number down.
  2. Then calculate the change in your cash balance for the same month (by looking at the cash balance on your balance sheet as compared to the prior month). Write that number down.
  3. Now compare the two numbers. (I can 100% guarantee you the two numbers are different. Why? Because profit or loss DOES NOT equal cash flow.)

Now explain to your spouse what happened to the cash for the month. Explain what caused the cash balance to go up (or down).

As an example, let's say your profit last month was $23,000. And your cash balance went up by $12,000. When you can very quickly explain what happened to the cash to your spouse or business partner, you understand your cash flow. You know what's going on financially. Which means you can put financial management aside for a bit and focus your time and efforts where you can make an exciting difference in the business.

That's why understanding your cash flow is so important. So you know what's going on. So you know what to do to improve cash flow. And so you can skip past the struggle, the worry, and the doubt and go right to the high-payoff activities that only you can do in your business.

That's the ultimate reason to make sure you understand your cash flow each month.

I am doing a live webinar on June 11, 2013 that you are going to love.

  1. I'll show you how to understand your cash flow in less than 10 minutes, and
  2. I'll show you how to explain what happened to the cash in your business last month (to your spouse or business partner) in a 2-minute conversation

And this one is FREE.

Understanding your cash flow used to be a time-consuming, complicated, and frustrating task. Not anymore!

Click here to learn more.

Or Click here to register NOW.


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

May 2013 is the previous archive.

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