Transcript from Podcast with Tim Ligon, Partner with SeatonHill

Charles: Hello, I am Charles Musgrove, host of The Answers That Count podcast. Thank you for joining us for another exciting show. Do me a favor before we get started, hit the subscribe button, hit the like button because. You know you’re going to love this podcast and it is going to be a great podcast. We got some great content coming to you today. We have Tim Ligon with Seaton Hill. Tim, welcome to the show today. Tim: Good afternoon, how are you? Charles:   I’m doing great. This is going to be a good show today. We’re going to talk about accounting, financial statements, and really, we’re going to bring this to real life, real-world current economic conditions. We are going to talk about the minimum wage increase that we’re seeing across many of the states in the United States. We’re going to talk about inflationary costs that these restaurants are going through, and really what the options are that the restaurant owner has to manage these cost increases over the long-term. So, Tim, this is going to be a great show, buckle up, before we get started, I want to give a special shout-out to Seaton Hill. So, I know that is the company that you partnered with, and John if you could put up that, I want to read just a little bit of information about Seaton Hill to give them special props for today. Seaton Hill Partners, they are the fastest-growing strategic CFO’s service firm in the nation. Can you believe that? Tim, you’ve joined a big firm there. For more than a decade our client’s success is our mission here at Seaton Hill. Seaton Hill Partners deliver the finance and operations expertise, only a team of veteran business finance executives can bring. We position our clients for sustained long-term growth and success in today’s complex business environment experience matters. If you want to call them for a no-cost consultation 850-524-0211 or check them out on seatonhill.com. So, Tim, you have joined up with a grey company there was Seaton Hill. So, you bring with you a great amount of restaurant experience. Now, I know you weren’t in the back kitchen flipping hamburgers, and making salads, and doing all that stuff, but you’re the financial guy. So, you were shoulder-to-shoulder with the owners of these large restaurant groups. So, you weren’t just the accountant or the accountant for one restaurant. You were part of a large organization so tell us a little bit about the positions and the experience that you’ve had working with restaurants. Tim:  Very good, Thanks, Charles. I grew up in a family grocery business, so I understand you know the small operation side and then went to work for the largest franchisee of Applebee’s and started with about 50 restaurants and grew it to 280 restaurants. I was the division controller for that organization and then we also acquired some other companies Don Pablo’s, Hops, McCormick and Schmick, and Canyon Cafe, work my way up to the corporate controller. It was really an operations-based CFO Finance guy, most recently I worked with a nonprofit that also ran a culinary college and had restaurants and Conference Centers and even a private club. So about 30 years + about Finance background on the CPA, and glad to be here and glad to be with Seaton Hill now. Charles:   Good, Tim, that is a lot of great experience in the restaurant industry, and we’d seen the restaurant industry, they’ve really been in the news over the past year. They were probably one of the industries that were hardest hit during covid so there was a lot of attention on the restaurant industry. And in, at least in the State of Florida, and there have been many other states recently also, they’ve gone through a mandated minimum wage increase. So, I know that right now you’re, you live in the state of Georgia and Georgia has not passed a state-mandated minimum wage increase so you still have in the state of Georgia the restaurant owners there have the benefit of a tip credit and they’re able to get a FICA tip credit as well. so, I know that’s a little bit in the weeds, but we want to talk big picture. Since you’ve got great experience working with those restaurant groups that were in multiple States you got a lot to offer as far as what these restaurants should what they’re going to be encountering if there is one state if they’re in multiple states on dealing with, not only the minimum wage increases but the inflationary called cost across the board. And how should they battle that? And how should they manage those increases? So, we want to touch on that in today’s show. So, I think with your experience you’re going to really provide a great voice and some great recommendations and insight on what these restaurant owners should be considering as they’re probably on the front end of a large increase in costs over the next few years. Tim: Sure. So, yeah, my first word of advice is to start planning now and do some modeling to make sure that you understand what the different options are out there. So, as Charles was saying that in Georgia, we haven’t had a price or an increase in minimum wage, but Florida has. Florida is going from, is it $8.65 in the end of September is going to $10. There is a tip credit portion that, you can bring that down $3. Charles:   3.02. The state of Florida still has that 3.02 tip credit that’s going to, it’s going to follow the increase in the minimum wage. So, when Florida hits 15 in 2026 the tip minimum wage is going to be $11.98 So, think about that. That is Tim that is a 116 % increase in the tip minimum wage in the state of Florida for that time period. That is a significant increase. Tim: Right. Every state is looking at the minimum wage increase. The federal government has had some proposals that haven’t passed yet and they were going to $15 without a tip credit. And so, the legislation nationally and then local municipalities have the right to increase and their areas even above what the minimum wage is and that is the federal minimum wage. So, it’s coming. And we got to get busy and there are some different restaurant groups out there that have looked at different options. One of them is the El Gauchos out of Seattle. They have gone to a service charge with a sales commission, and so how that would work is and they’ve done a big campaign to educate their guests how this works is that every charge, it automatically has a service charge. We’re all sort of used to that if you’ve been out to dinner with a party of six or eight or above and it says you’re going to get 20% added to your ticket. This is every ticket. And so, one of the options is that you go that route, and it takes the education of your guests of why you’re doing it, and then sort of, the guest pays that, and it becomes the revenue for the organization and then you pay the employee at minimum wage or above and then you pay them a sales commission based off of, in addition to the minimum wage. Their goal and what they found is that they’re getting their employees to a sustainable living wage having a consistent wage versus the peaks and valleys of making a little bit of nothing one day and the feast and famine of the server world. Charles:   Yeah. It’s interesting you talk about El Gaucho, that’s, we’ve had several conversations with the owner of that restaurant group, Chad McKay and he has, it’s interesting in the Seattle area, he implemented that model back in probably 6 years ago when Seattle first started that implemented that model back in probably 6 years ago when Seattle first started that march upwards on their minimum wage increases. And they actually do a $1 per hour minimum wage and then they do a sales commission of 15% for all of the sales that that server or bartender is responsible for. So, it puts a, it’s a very interesting model and the success he’s had with that is just been tremendous both from his standpoint, where he’s not, he’s not had profit erode as these increases in cost have occurred and his servers and bartenders have made more money than what they made under a tipping model and its customers have been satisfied. So, it’s really a win-win-win based on the encounter that he’s experienced and the success that he’s had implementing that service charge and commission base pay for servers and bartenders. Tim: Right, and so it’s not a one-size-fits-all, and I think that it works better for a higher ticket than it does for you know if you’re running a counter service or if you’re doing. It may not be the best, so another alternative is the European model. Charles, I’m afraid I’m getting, my screen keeps freezing. Charles:   We’re back now. So, Tim, we were talking about the commission model is, you know you can’t have one size fits all, and I think that even goes to the details of if you decided if you made the analysis and you determine that the commission model and service charge was the right model there’s various decision points that you have to make within that. What service charge do you charge your customers, what commission do you pay your service and bartenders, do you also pay them, what is the minimum wage that you pay them, or their wage that they get in addition to the commission. So, there’s a lot of factors to consider that even if you choose the service charge and commission but there are other options out there also you mentioned the European model. So, describe what you mean by the European model. Tim: So, what the European model is the service charge is built into the price of the entree and appetizers and so forth. So, if you have say a $20 item you know cuz that’s what you’re going to pay you’re not going to go okay with 20 plus I’m going to pay 20% more on that so it’s really a $24 item. It’s a $20 item. And so, you know, in some respects that seems great you know you don’t have to do an additional tip, you’re welcome, to but it also you know it does create an initiative from the server to go on and above for excellence service. Because you know if you know I’m guaranteed this, are they gonna put in the extra effort? Charles:   Yeah, I think you’re exactly right. In that model in that European model, the price increase is built into the entrees are the items that you order. So that’s on the customer side than on the employee side the customer side and then on the employee side those servers and wait staff they’re paid a designated rate per hour, so they have they get no benefit for good service or no downside for bad service. So, you’re exactly right there’s no incentive there’s no economic incentive built into that model so that they will have they will provide good service because they’re going to get paid more money. So, that is if you talk to people that have visited or if you visited a European country one of the comments is always, we if we’re used to what we get in in the US with good service and we’re able to incentivize our wait staff then we have better service. We don’t want to go to that European model from a service standpoint. Tim: And then another area of opportunity that some restaurants are looking at it as more of an administrative fee. You know adding 2 or 3% just to the check if you stayed at a resort, you’ve r sometimes seen that where it’s just an automatic fee on top of it. But it does help to cover some of the additional costs that are, that they are incurring as the business owner, the restaurant core, to make that, to cover the bottom line. And then a third area, or I guess it’s a fourth area that restaurants have looked at is profit sharing. And so having something where the more we make, the more you make. And, and that is you know a double-edged sword whether you want to go to that or if you’re able to do that profit sharing. But it is an option that should be explored. And then another area that some are looking at is looking at you know, do I need to change my mode of business and go away from the server model and go straight to counter service. And then you’re eliminating that cost and then dealing with what do I pay the server, and what the path is and go back the basics that you know they can control a little bit more and, and you’re seeing more and more counter services with the whole explosion over the past years of the fast-casual that people are more used to and some people like it because they don’t have to tip. It’s you know I know where my cost is gonna go going in and I get to know what the quality is and make those decisions. Charles:   Yea, I think a lot of, even with this covid thing we’ve had over the past year in 2020 people got accustomed to something similar to a counter service where maybe they were picking up and taking out, but they weren’t dining in a restaurant. So, I think we’re going to see technology to continue to improve to make the people that are working more efficient. therefore, they can do more, therefore, you have less employees, less labor dollars but you have a higher technology cost. So, I think you’re gonna see all of those and one of the things that you started out is to begin the planning process now. Go ahead and do the analysis on these different options so you’ll know which one fits you best. And the one that you mentioned last was a change of the model. SO, if you’re a full-service restaurant and you look to maybe the alternative, or the best option for us is to change our model to a counter service type model. So, that’s a pretty dramatic change when you do that because it’s going to have an effect on your revenue. So, we talk to restaurant owners that have gone from a fast casual to a full service or vice versa and it does have an impact on the revenue. Now, you can’t put revenue in the bank, you put bottom line profits in the bank so that’s what you have to look at, is what’s the ending bottom line that I’m going to have. So Tim something that we’ve kind of touched on is if you go to the service charge model then you’re going to go away from the tip model therefore you won’t have the financial or tax advantage of the FICA tip credit so what are your thoughts on the benefits of that FICA tip credit and how to do the analysis when you see that decrease or if it goes away when you go to that service charge model. Tim: Well, I think you probably have some restaurateurs that are not taking advantage of the FICA tip credit. That it’s a model that you know you have to apply for and work and do the calculations and so the owner has responsibilities to be able to claim that FICA tip credit with ensuring that the servers are recording their tips and making sure that their pay with their tips and what you’re paying below the minimum wage is that you’re getting them back above at least the minimum wage. And then the server has the responsibility that has always been there, is to claim not only their credit card tips but their cash tips. And so in doing that FICA tip credit, it’s your payroll service should be able to provide you some guidance and of course, we could help you guide through that area to create whether the FICA tip credit is the elimination of it if you’re going with a service charge and a sales commission of you know, are you going to get that benefit and or, lose that benefit and is it the outcome is going to be greater by having the service model. And then the other piece that you got to factor in with all this is you know the cost of benefits, and are you going to be providing, are you providing benefits. And we’ve all seen that you know, the cost of medical insurance just every year is up and up and up and continuing but you know, if you’re not giving benefits that’s a portion that you really need to be looking at before it becomes mandated that you have to. And so, factoring those in you know, how do I need to tweak my business model to be able to get the employee paid the new minimum wage, or how you’re going to build yours also the benefits and still be able to sustain going forward. Charles:   Right, and it’s, you know when you have your wage increase, when your minimum wage increases then not only does that have an impact on the benefits, but it also has an impact on the taxes, your payroll taxes, your insurance, your workers comp insurance. So, all of those also are a ripple effect of the increase in that wage cost. So, you know, it’s oh, you really can’t just look at what is going to happen to minimum wage, but you also have the ripple effect in the other areas. And then you got the wage compression issue too which is another factor that needs to be considered. You know, if you are paying somebody now the bottom line a minimum wage, or near that, and minimum wage is going up then you’re going to have to increase those people that are close to that minimum wage as it is. Tim: Right. Well, you probably have been paying your back of the house people above minimum wage and so if they are at 12 to $15 an hour and the minimum wage is going up, they’re going to go up, then your power lead management, your salary management, they’re going to be pushing up against them. So, compression is a very real thing that you have to model in those facts. Charles:   Right, exactly right. So, when you are dealing with these multi-unit franchisees in the past, and you were in multiple States, what is it like to deal with the complexity of the taxing laws and the wage and hour laws in different states? Tim: It’s very dramatic differences between states, and so you can’t just mandate and say we are going to have one wage across the country. You have to look at it you know, within that state and within the city, what is dictating it, and the cost of living in those locations drives what the hourly rate is, and then are you competitive to attract employees. So right now, we all know how hard it is going to a restaurant. There’s been a panhandle about a month ago and one of the restaurants we went into was seating one of the seating areas because that’s all the employees they had to do it. And where the rest of the restaurant was sitting was empty. So, you have to look at it you know, the federal subsidy for unemployment in some states are starting to roll off of that, and then what is the rate that you’re going to have to pay. The pandemic, because of people wanting to work has increased the hourly wages and it said just to attract employees, the limited people that were wanting to work and so those costs are, you know you start high, you bring them in at that price, you can’t take them back down. You have to continue and maintain that and so that’s the reason for it. And then we also have the fact that the PPE and the other government subsidiaries are wearing off and people have burned through those or they have you know whether they have had two or they reinvested in their business, but those funds you know, I don’t see them coming when unemployment is back where it should be. And so again you know, the challenges of running a restaurant you know, and the complexity with tip credit and different things is much more than just a standard retail operation. Charles:   It is very complex and right now but the government money that’s been available, but we’ve seen the incentives with the unemployment incentives that the government has paid has really had I think an unintended consequence to those in the labor pool right now. So, you’re experience that you talked about there where you went to a Florida restaurant, and they were seating in one area that’s reality. A lot of these restaurant owners are having a difficult time getting the employees they need to be a full operation and the customers are out there now. People are, they’re back into spending money, they’re back to going to restaurants. SO, it’s almost like the customers are overpowering what a lot of these restaurants are able to Provide right now. So, for how long that continues, we do not know But I think you really reveal another factor that you’ve got to make sure that you account for, and that things are, wages just have them put stop now just because of the demand for employees. So, is this the time to look at a model that is going to be commission-based, it’s going to really make that compensation to be a variable cost based on the sales that happened. So now could be the right time to do the evaluation oh, it may be the right time to implement some of those significant changes that you would think, hey we’re doing good we don’t want to upset the apple cart right now, well it could be that that exact opposite is true. Now cookie the opportune time to make those changes. Tim: Absolutely, you need to look at it and figure it out today so you can be ahead of the game. You know, trying to change something between now and September 30th may not you know, be feasible but you know a year from now you’re going to bump another dollar and then another dollar and another dollar and so with oh, and then we don’t know if I’m a federal level with the mandates are going to do but we know that they are out there, and so something is coming, and if you just sit and rest on your laurels then you know it’s going to pass you by and then you’re going to wonder how am I going to make my next payroll. Charles:

Exactly, you are going to be unprepared, and we have seen states that are on the Left Coast, they’ve already implemented a lot of these cost increases, California, we’ve talked about Washington, Seattle, Oregon, the federal government has talked about that. They kind of revealed what their intent is which is they are going to jump right into 15 across all the locations in the United States with no tip credit. so, you know, you are looking at some dramatic changes if those are implemented on a federal basis. So, you’re right, the time to do it is now the time to plan is now. And Tim before we jump off what is your email address. Let’s leave that for the viewers. Tim: It’s tim.ligon@seatonhill.com Charles:

Tim it’s been a pleasure to have you on the show today. You have provided some great information with your experience, working with restaurants, and we want to make sure that we want to provide great service to the restaurant and really provide good content to help them navigate these changes and these cost increases that they’re going to be facing for now and into the near future that we see. Tim: Well, thank you Charles, I appreciate it. Charles: It’s been a great deal it’s been a great show Thank you for watching the answers that count podcast. I’m your host Charles Musgrove. If you haven’t done it, please hit the subscribe button. Hit the like button because this has been an awesome show. Thanks to Tim.  

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