Assurance Services · Restaurant CFO Bootcamp ® · Tax Services · Payroll · Outsourced Accounting · Benchmarking 1 Menu – Spring 2011 • Is group discounting right for your restaurant? • New IRS guidance on gift card income deferral • Private equity financing: the other line of credit • Edible observations (sidebars) (continued on page 2) We know restaurants. SS&G has built a team of experts in restaurant financial management and operations. Our specialists have been recognized for excellence in their chosen field. We are one of a select few firms in the country specializing in the financial aspects of restaurants and have the knowledge to provide real value to your business. Call us. Let’s do lunch! Is group discounting right for your restaurant? Coupons have been used for more than 100 years as a marketing strategy. In the late 1990s, coupon usage hit an all-time high before peaking and declining during the first half of the next decade. Recently, however, the “Great Recession” created a resurgence in coupon usage as Americans look for ways to save money. Internet-based coupon distribution websites, like Groupon, LivingSocial, BuyWithMe, Jasmere.com, and Weforia are becoming increasingly popular and changing the way we think about couponing. Instead of sifting through flyers and clipping paper coupons, these websites offer deal-of-the-day promotions delivered directly to a consumer’s e-mail inbox. Discounts typically range from 50 percent to 90 percent off of regular retail prices. From the retail perspective, group buying websites help companies increase their visibility in a marketplace by developing and distributing a coupon, via e-mail, to a specific target market or locale. When consumers register to receive daily coupon deals from one of these sites, they are asked to enter demographic information, such as gender and zip code. Users may also have the option to specify the types of deals that interest them. According to Groupon, users of these websites tend to be young, female, educated, single, tech-savvy, and employed full-time with discretionary income. By understanding how these sites work and who typically takes advantage of the deals, a restaurant owner can customize an offer. If it is happy hour you want to promote, then a “2-for-1” drink special or free appetizer coupon can be offered. If your Saturday lunch business is slow, offer $20 worth of food for a $10 purchase price, redeemable on Saturdays between 11 a.m. and 3 p.m. You can do almost anything with these types of online coupons; it all depends on your goal. Fresh Ideas for Today’s Successful Restaurateurs » Chicago June 15–17 » Las Vegas Sept. 21–23 March over to www.SSandG.com/events for itinerary and to register 2011 Restaurant CFO Bootcamp®
• Private equity financing: the other line of credit
• Edible observations (sidebars)
(continued on page 2)
We know restaurants.SS&G has built a team of experts in restaurant financial management and operations. Our specialists have been recognized for excellence in their chosen field.
We are one of a select few firms in the country specializing in the financial aspects of restaurants and have the knowledge to provide real value to your business.
Call us. Let’s do lunch!
Is group discounting right for your restaurant?
Coupons have been used for more than 100 years as a marketing strategy. In the late 1990s, coupon usage hit an all-time high before peaking and declining during the first half of the next decade. Recently, however, the “Great Recession” created a resurgence in coupon usage as Americans look for ways to save money.
Internet-based coupon distribution websites, like Groupon, LivingSocial, BuyWithMe, Jasmere.com, and Weforia are becoming increasingly popular and changing the way we think about couponing. Instead of sifting through flyers and clipping paper coupons, these websites offer deal-of-the-day promotions delivered directly to a consumer’s e-mail inbox. Discounts typically range from 50 percent to 90 percent off of regular retail prices.
From the retail perspective, group buying websites help companies increase their visibility in a marketplace by developing and distributing a coupon, via e-mail, to a specific target market or locale. When consumers register to receive daily coupon deals from one of these sites, they are asked to enter demographic information, such as gender and zip code. Users may also have the option to specify the types of deals that interest them. According to Groupon, users of these websites tend to be young, female, educated, single, tech-savvy, and employed full-time with discretionary income. By understanding how these sites work and who typically takes advantage of the deals, a restaurant owner can customize an offer. If it is happy hour you want to promote, then a “2-for-1” drink special or free appetizer coupon can be offered. If your Saturday lunch business is slow, offer $20 worth of food for a $10 purchase price, redeemable on Saturdays between 11 a.m. and 3 p.m. You can do almost anything with these types of online coupons; it all depends on your goal.
Fresh Ideas for Today’s Successful Restaurateurs
» Chicago June 15–17
» Las Vegas Sept. 21–23
March over to www.SSandG.com/eventsfor itinerary and to register
2011Restaurant CFO
Bootcamp®
(continued from front cover)
2 Spring 2011
Getting startedSigning up for most group buying websites is very easy – we’ll use Groupon as an example. Simply log on at www.grouponworks.com to fill out an application. You can submit an application online or you can call and speak with a sales representative. After providing a brief description of your business, industry, and geographic market, a Groupon representative will contact you to discuss the terms. If you are accepted, your business will then be showcased. Ultimately, Groupon makes the final decision on whether or not to accept your business. If Groupon accepts your offer, they handle all the editorial work needed to create the coupon, manage distribution of the coupon, and communicate to you the date that your business will appear on its website.
The contract surrounding each Groupon is valid only if a predetermined number of coupons is purchased. This means that neither party involved is paid nor receives a coupon unless the predetermined number of coupons is sold. When the target number of coupons is sold, Groupon receives a percentage of revenue from the sale (usually 50 percent to 60 percent) and then mails you a check for the difference.
ConsiderationsThere are many factors to consider when deciding whether or not to utilize these websites to promote your business. Here are a few important considerations:
Internet couponing sites can be a fantastic outlet to promote your restaurant, but the method is only successful if you maintain a high level of customer service. These websites have a forum allowing members to comment on their experiences. It is, essentially, a real time, online restaurant review. If member reviews are poor, your opportunity can backfire and become a liability.
ResultsBeing showcased on one of these deal-of-the-day sites usually provides a large upfront revenue spike for most businesses. Redemption rates vary by market and industry, but the national average is approximately 85 percent to 90 percent. Some businesses experience great success, while others cave under the immediate rush of customers the coupon can create. Gigi’s Cupcakes, a new cupcake bakery in Louisville, Ky., is a good example of a success story. The company was struggling to get its name out so it turned to Groupon. The coupon created for Gigi’s offered six cupcakes for the price of three (a $9 savings). Approximately 1,700 coupons were purchased online that day. The bakery saw increased brand recognition and increased profits. The owners reported an immediate surge in activity the very next day, and a 22 percent increase in traffic over the four months following the advertisement.
A healthy number of businesses have experienced positive results with group buying websites; however, others have not been so lucky. Lack of planning, poor customer service or the inability to handle the increased volume has resulted in many restaurants turning away prospective customers or losing the possibility of repeat business. These failures are avoidable.Oncetheonline coupon is released, ensure that your restaurant will have proper staffing levels and enough inventory to meet the increased demand.
Accounting complicationsAs with any revenue-producing vehicle, the accounting can be confusing. Under generally accepted accounting principles (GAAP), a deferred liability in the amount of the cash your company receives would be recognized. This liability is released at the time the customer redeems the certificate; no expense for the discount is recognized until then. Talk with a professional in order to properly account for the transactions under GAAP. The impact to your P&L will be lower sales, resulting in a higher cost of sales relative to sales. For federal income tax purposes, the treatment would be the same. No deductible expense for the discount can be recognized until the customer redeems the certificate.
These Internet-based coupon distribution sites are introducing consumers to new restaurants and causing quite a stir in consumer spending. If your restaurant has recently opened, if sales have been stagnant, or if you have the capacity for more customers, perhaps this type of advertising is right for you. Consider all the options, the pros and cons, as well as your restaurant’s personality before jumping on board with a group buying website – the ultimate goal isrepeatbusiness,notsimplyaone-timespikeinsales.Onlinecouponingmayhelpopenthedoor for new guests, but it is ultimately your responsibility to keep them coming back.
Gift card popularity has exploded in recent years, allowing restaurants and retailers to increase sales and collect cash up front while deferring the recognition of the associated income. Deferral of taxable income from the sale of gift cards has been a hot issue for the IRS in recent years, particularly with respect to gift cards sold by one entity and redeemed by another.
The much-anticipated IRS guidance came in January 2011 with the issuance of Revenue Procedure 2011-18. This Revenue Procedure expanded the use of the one-year income deferral method for gift card sales under certain types of arrangements where a gift card may be sold by one taxpayer and redeemed by a different taxpayer.
Historically, gift cards were sold and redeemed by a single party. As gift cards have increased in popularity over time, this practice has been replaced by more complex arrangements including:
• Relatedgroupofrestaurantcompaniesthathaveagreementsbetweenmemberstoallowthesale and acceptance of gift cards between companies that are separate taxpayers
• Afranchisorandindependentlyownedfranchiseemaysellgiftcardsthatareredeemableatany member location
• Arestaurantmanagementcompanymaysellgiftcardsthatmayberedeemedbyparticipatingrestaurants under its management umbrella
For tax purposes, many taxpayers currently recognize revenue under a one-year deferral methodintheexistingRevenueProcedure2004-34.Inrecentyears,theIRShastakenaharshinterpretation of the existing law, requiring that the “same taxpayer” both sell and redeem the gift cards. This became problematic for taxpayers that have more complex structures such as those listed above.
The recently issued guidance included taxpayers that were previously unable to use this deferral provision due to the strict interpretation of the “same taxpayer” rule. This new guidance allows taxpayers that sell gift cards that are redeemable by third parties to have the same one-year income deferral treatment as those with a single-entity structure.
It is important to note that the new IRS guidance does not change the requirements for the two-year income deferral for advance payments under Treas. Reg.§1.451-5.Tobeeligibleforthislongerdeferralperiod, the entity that sells the gift card must be the same entity that redeems the gift card.
It is anticipated that the IRS will continue to scrutinize gift card arrangements and income deferral methods in future examinations. Please contact your tax adviser to ensure your company is using the proper methods.
Private equity financing: the other line of credit
The amount of private equity funding is on the rise, especially in the restaurant industry. Private equity investments can spur growth, create much needed working capital, and provide an array of resources to privately owned businesses looking to expand, restructure, or enter new markets. Private equity (PE) firms take an interest in concepts that have high yields (or margins), great leadership teams, long-term sustainable growth potential, and broad geographic appeal. When a business owner decides to leverage a PE firm for growth capital, he/she needs to consider the price tag.
With a private equity investment, you are essentially inviting a new partner into your company. The chemistry between you and this new partner is extremely important. Choosing the right PE partner is a bit like choosing a spouse, figuratively speaking. Do you have a common vision?Doyousharethesamegoals?Doyourpersonalitiescomplementoneanother?Disenfranchised expectations at inception can cause disappointment and unwanted friction in the future.
A PE firm normally requires more formality in terms of governance. This is achieved by having a representative from the PE firm on the board of directors or as a member of the executive management team. It is important to remember that PE firms are making a substantial investment in your company and it is in their best interest to be an integral part of your business. Instead of a sole proprietorship, you now have a partnership. Decisions that were previously your responsibility may now require general consensus. You should also be aware that PE firms demand a higher return on the capital invested than traditional lending sources. Higher risks demand a higher return. The PE firm is taking a greater risk on your concept and the return must be equivalent to the risk taken.
PE firms normally do not make an investment for the long haul; rather, they look to have an exit plan within five to 10 years. Their hope is that the concept will be the next “big thing,” popping up in every city across the country (think Five Guys); at that point, they will generally sell or take the company public.
When drafting an operating agreement, keep in mind that the following rights and benefits are normally negotiated for PE firms:
• Shareswithliquidationpreference.ThismeansthatthePEfirmnormallygetspaid back first with a cumulative rate of return
• Votingpoweronsignificantdecisionsimpactingthegrowthandvisionofthe company
Private equity financing: the other line of credit(continued from page 5)
Fresh Ideas for Today’s Successful Restaurateurs
A private equity investment may be the solution you are looking for to facilitate growth and/or leverage current momentum. Remember to consider what you will be gaining, what you will be losing, and set realistic expectations. When all involved parties are on the same page from the beginning, a great partnership with a private equity firm can lead to great successes for your business.
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