IBA has successfully represented entrepreneurs in the sale of franchised restaurant chains many times in its forty year history as the premier business brokerage firm in the Pacific Northwest. In a recent meeting with the owner of a well established chain of franchised restaurants the subject of the minimum wage legislation passed in Seattle on June 2, 2014 was discussed. This legislation includes franchised restaurants in the group with the accelerated schedule to increase the current minimum wage rate from $9.32 per hour to $15 per hour for employers with more than 500 employees over the next three years (the schedule is four years if health insurance is provided) because the franchise has over 500 employees nationally. Smaller employers have been provided seven years to increase their minimum wage rate to $15 per hour under the legislation.
As a political talking point, raising the minimum wage will appeal to certain constituencies, however at an entrepreneur level it will likely either force businesses to adapt or close their doors.
My analysis of the potential impact of the legislation starts with the review of the financial health of a mature franchised restaurant in the Seattle metropolitan area. The restaurant had gross revenues of $1,178,711 in 2013. The business had food costs of $366,079 and labor expense of $339,065 resulting in a gross profit of $462,971. Subtracting the operating costs of $315,021 including rent, franchise royalties, advertising, etc. produces net income of $147,950 or 12.6% of revenue for the owner of the business before taxes. Assuming the entrepreneur is married, the appropriate federal tax rate on an executive salary of $147,950 would be 25% resulting in an after tax income of $110,962. This is a good income for an entrepreneur on a single location restaurant; however it is an income that is also reflective of the capital invested & risk assumed by ownership.
Now let’s look at the figures, if the assumption is made that revenues and other expenses remain fairly constant, but labor costs for 50% of the staff are increased 50% from $10 to $15 based on the legislation. This change would result in labor expense increasing to $423,832, gross profit falling to $388,800, and net income falling to $73,779 before federal taxes.
The owner of the business can respond to this situation in several ways. They can accept it as the present reality. They can attempt to raise prices, reduce the quantity of food offered at certain prices or reduce the quality of the food served (organic versus non organic chicken). None of these consumer oriented changes are likely to be received positively by the customers of the business and could result in a decrease in customers & revenue. The final option available is to automate. As labor costs rise, you are already seeing automation occurring in the food service industry. A generation ago, beverages were commonly filled by employees. Today, self service soda stations are the standard. Take a minute to think about the man hours saved by allocating that labor to the customer versus an employee. The change in business model has saved food service businesses millions of dollars. It has also removed entry level jobs from the marketplace. Consider how many jobs would be lost; if instead of having a barista make your latte at Starbucks, you received your latte from a machine that responded to your entries in a touchpad. Now ask yourself, how many people do you know that have worked at a Starbucks in their life.
The business owner I discussed the minimum wage legislation with takes great pride in the opportunities he has provided entry level workers. He has provided first jobs to high school students, employment to college students, and opportunities to advance into management with higher compensation to men & women who wish to work in the food service industry. The entrepreneur has numerous employees who have worked with him for more than five years and consider the work environment a superior place to earn a living.
On a personal note, my first job was as a dishwasher at a restaurant at a minimum wage rate of $3.35 an hour. The job provided me with my first taste of financial independence and provided one of the building blocks that developed the work ethic necessary for success later in life. Financial compensation is only one of the benefits of a minimum wage job offers an individual. It would be unfortunate if future generations were not provided the opportunity to receive experience and mentorship on life skills because the jobs disappear due to legislation executed without proper analysis of its impact from all perspectives.
It should be noted that Washington currently has the highest minimum wage in the fifty states at $9.32. The minimum wage is scheduled to increase across the state to $9.47 on January 1, 2015. Our state is already a national leader in “fair” compensation for employees.
IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, and mergers & acquisitions community on subjects relevant to the purchase & sale of privately held companies and family owned businesses. IBA is recognized as one of the best business brokerage firms in the nation in terms of successfully negotiating transactions that are “win-win” in an environment of full disclosure between the parties.