What ASC 606 means for the restaurant industry

The new revenue recognition standard issued in 2014 is finally here. ASC 606: Revenue from Contracts with Customers will affect nearly every company in America — including restaurants.

It replaces multiple pieces of revenue recognition guidance with one overarching principles-based standard that any company in any industry could apply to its revenue transactions, converging for the most part with the international standards.

“One downside is that it’s a one-size-fits-all, which we all know doesn’t always work as well as customized guidance might,” says Angela Newell, national assurance partner with the BDO Dallas office.

In the restaurant space, franchisors are going to feel the change the most.

Smart Business spoke with Newell about the new revenue recognition standard and its impact on restaurants.

What changes will the restaurant space see?

The new standard will result in a significant change in the accounting for upfront franchise fees and area development fees charged by franchisors.

Franchisors typically recognize franchise fees when a franchise opens. Under the new standard, franchisors will likely defer that upfront franchise fee and recognize it over the franchise term, which can be 10 or more years, putting the fee on the balance sheet and amortizing it into revenue over the period. The thought is that the value to the franchisee doesn’t end when the store opens, it continues over the life of that franchise agreement. Going forward, franchisors will report a deferred revenue liability on their balance sheet. This new liability needs to be communicated to stakeholders.

While franchisees and owner/operators aren’t expected to experience the same far-reaching changes, they may have to make changes to the accounting for their gift cards and loyalty programs.

Everyone — franchisees, franchisors and owner/operators — will have to comply with additional footnote disclosures. They need to ensure they have access to the information and then be prepared to report it regularly.

When do the new rules go into effect?

The new standard is effective for calendar year-end public companies on Jan. 1, 2018. Private companies get an extra year. Calendar year-end private companies won’t have to adopt until Jan. 1, 2019.

What should companies do now?

Many restaurant companies, especially smaller private companies, haven’t spent much time on this, because it’s not effective for them until 2019. While restaurants are impacted less than some, the change may be painful because they’re not used to dealing with complicated revenue recognition.

Start by making sure you understand the standard and what it entails for your company. Accounting firms have published short implementation guides that help explain the impact. Even if the standard isn’t effective for you until 2019, plan ahead and, to the extent you can, do a dry run to work the kinks out. If your company uses systems to account for franchise revenues, make sure the system can handle the new accounting rules. No matter how easy it seems, it takes a while to get those changes pushed through an IT system and tested. If you’ve never needed such a system, it may be time to think about one in order to add efficiency.

Some franchisors are thinking about their current structure and whether or not there’s a business case for changes, such as shorter franchise agreements or a different fee.

Franchisors also should consider how this may impact their external metrics. Financial statement changes need to be communicated to investors, owners, private equity, lenders or even a management team with bonuses connected to earnings. If debt covenants are tied to EBIDTA metrics, EBIDTA in the current period obviously goes down when revenues are deferred. The new standard has been well-publicized, though, so it shouldn’t be a surprise to most lenders.

In addition, a new leasing standard is effective for public companies in 2019 and for private companies in 2020, under which lessees must put all of their leases on their balance sheet. This change will be even more impactful than the changes to revenue accounting. If companies need to talk to their lenders about the impact the new revenue standard will have on debt covenants, consider including a discussion of the new leasing standard, as it will be easier to address the impact of both at once.

Insights Accounting is brought to you by BDO USA, LLP

Restaurants oppose $7.2 billion credit-card fee settlement

NEW YORK, Tue Sep 25, 2012 – The National Restaurant Association said Tuesday it is joining the opposition to a proposed $7.2 billion settlement between some retailers and Visa Inc and MasterCard Inc. over fees for credit card transactions.

The NRA, which represents the $600 billion U.S. restaurant industry, is the last of six trade groups leading the case to weigh in on the potentially historic settlement.

The trade group’s chief concern is that the settlement would prohibit all merchants that use Visa and MasterCard – whether they decide to opt in or opt out of the settlement – from filing future lawsuits over interchange issues.

“There is strong concern that the proposed settlement agreement will not achieve the litigation’s most critical goal – to fundamentally change a broken marketplace in which swipe fees are set,” NRA President and CEO Dawn Sweeney said in a statement.

NRA’s board of directors unanimously voted to throw the trade group’s weight behind the opposition amassing against the settlement, the group said. While the group has been pushing for reforms that would bring transparency to the interchange system and help lower costs for restaurants, the proposed settlement accomplishes neither, it said.

The antitrust settlement was announced in July and requires the approval of U.S. District Judge John Gleeson in Brooklyn, New York, a process that could stretch well into 2013. If it does receive approval, the settlement would be the largest of its kind in U.S. history, resolving a seven-year-old lawsuit accusing Visa and MasterCard of conspiring with major banks to artificially inflate swipe fees.

Cameron Mitchell finds capital to grow his restaurants

Cameron Mitchell, president and founder, Cameron Mitchell Restaurants

Cameron Mitchell has a challenge that will not go away: having enough capital to keep his diverse portfolio of restaurants operating and expanding.

Mitchell’s constant concern for funds in a capital-intensive business has taught him that there are lots of ways to keep the momentum going, but one approach is a sure solution:

“Constant finagling,” he says. “It depends on the situation. It’s like we might have to hold a part of the distribution to make things work. Or we might re-up with the bank, increase our line of credit at the bank, or we might demand a landlord give us tenant improvement dollars sooner versus later. It just depends on all sorts of things.”

The sure thing is that Mitchell continues to set his sights on expanding his current concepts and developing new ones. The company has 18 units with seven individual themes as well as a catering company and a sister company, Rusty Bucket Restaurant & Tavern. Plans are to introduce the Ocean Prime concept into several major cities in the U.S., including New York, Chicago and Houston.

“The situation is all driven by development,” says Mitchell, president, and who founded Cameron Mitchell Restaurants LLC in 1993. He’s a classic example in the restaurant business of going from the dish room to the board room. His first position was as a dishwasher at a Columbus steakhouse. From there, with a degree from the Culinary Institute of America, he worked his way up and became head of his own restaurant company. Mitchell has received numerous awards from organizations to recognize his success.

Keeping the status quo is not on his mind, even though it means steering through a sometimes stormy sea in terms of the restaurant industry.

“You may have multiple developments at one time. So just the way the timing is may make it tight. It just depends, you can’t always dictate when your new locations are going to open, so you might have three restaurants in a year to do and they all open within three months of each other.

“Sometimes you might end up OK this month, and then next month you are tight,” he says.

Maybe not exactly what you’d expect to hear from someone who in 2008 sold two of his most popular themes, Mitchell’s/Columbus Fish Market and Mitchell’s/Cameron’s Steakhouse — a total of 22 restaurants — to Ruth’s Hospitality Group for $92 million.

But Mitchell didn’t rest. He has spent the years since that sale reinvigorating Cameron Mitchell Restaurants, developing new concepts and new locations.

Even though annual sales are $70 million, the thought of deciding he had reached his goal hasn’t entered his mind.

“I think it is impossible to get to that point because I might be where I want to be but the company has 2,400 employees now, and they have dreams, goals and aspirations — people are building their careers with the company,” Mitchell says. “And if I say, ‘Hey, I’ve had enough. I’m fine,’ well, that kind of messes them up. I can’t do that. So we continue to grow and develop the company for the betterment of all our people, our partners and our communities in which we do business.”

Here are some of Mitchell’s tips on the challenges of getting and managing capital to keep your business operating and on an expansion journey.

Prepare your case

Market entry strategy, mergers and acquisitions, organic and inorganic growth — you’ve heard all of the buzzwords about expanding your business. And in this age of the entrepreneur, you’ve heard about vision, passion and energy.

Combining those ideas can result in a motivational quotient that can’t be beat. The only missing ingredient is capital.

Shopping around for lenders or investors who are favorable to working with your market area is a good start.

“Some lenders have different tactics, standards and loan profiles,” Mitchell says. “Some are comfortable doing particular industries and some are not. Find ones that are comfortable in your field.”

Likewise, evaluate how comfortable you are with them. Look for indications that would open the door to a transparent relationship, where you feel free to discuss all aspects of your business necessary for your success.

“You want to keep them abreast of your information,” Mitchell says. “Let them know if you are running into potholes, let them know first, and why. Just be upfront with them. Better to ask for permission than ask for forgiveness.”

Before you make your pitch, there are five things you want to have prepared: a good story to tell, a good plan in place, a strong development plan, answers to all potential questions and solid economic models.

While all these steps are important, the first step should be to tell a good story, one that relies heavily on your character. Lenders want to hear about honesty, dedication, ethics and your values.

“Hopefully you’ve built some integrity and a reputation over the years, that you do what you say you were going to do, and your word is good, and I think that starts with that,” Mitchell says. “It starts with character.

“Before you get a loan, a bank likes sound numbers and absolutely that’s going to be important. But if they don’t feel you’re a good character, they might not want to lend you any money. So it starts with that, the good story, good track record and a good plan.”

You also have to be concerned about the costs involved with a bank loan. Rates and terms can vary widely. Banks are usually the cheapest but they are the toughest. When things go wrong, they want to know about it.”

Banks have to decide who gets a loan and who doesn’t and borrowers who have borrowed one or more times and have paid back one or more loans on time will get preference.

Venture capitalists, on the other hand, usually make high-risk loans and aren’t really interested in the profit prospects of your business. Low-risk and low-profit ventures are music to a banker’s ears rather that the dissonant sounds of high risk businesses or those with no record of successfully paying back loans.

If the bank loan route doesn’t seem to be the one for you, try limited partnerships, either with investors or private equity firms. There are trade-offs with each. Both are in it for the money which they hope to earn by investing in your business.

“Investors are in for the long haul, usually don’t have control and they don’t have recourse, but they want a much bigger return,” Mitchell says.

You may want to try a private equity fund, which is normally a limited partnership with a set term of five to 10 years.

“It’s the most expensive form of capital but yes, it is an option,” he says. Mitchell says this is his least favorite choice, and he has not taken that route over his years in the business.

“The thing with that is you usually give up a piece of control for that,” he says. “And they want to be on the board, and they want to have control, and they want to bring their guys to help run the company. It just gets to be a little bit trying. They may want to get out after five years. They typically want to have a sale transaction then. You may not be ready for that.”

Manage the capital that you have

If you can’t get an infusion of capital or it will be some time in coming, your alternative is to manage what you have. While that may involve the “finagling” Mitchell mentioned earlier, another method is to let your foot off the gas, but not step on the brakes.

“The best way to manage your capital is by your throttle,” he says. “By reducing developments, and slowing down developments, you let the business catch up if you’re behind.”

Putting a freeze on new expansions is effective, but it may come with a price.

“It’s not always a good option to stop growth and stop development,” Mitchell says. “In my opinion, it should be kind of the last option. But it’s definitely a good option if you need to raise cash.”

A better position to be in is building your identity and company culture to withstand the challenges of rapid growth. That way, there is less danger of expanding too fast.

“Maybe some people lose their way, but not us,” Mitchell says. “We hold our brand and our culture very, very dear to our heart. We work on them every day, and take care of them every day. It helps to strengthen the business.

“I wanted to write our philosophy and create the culture and values of the company that I wanted to build. So once I got that written, I went about the process of building a company around that culture. I’m still doing that today.”

How to reach: Cameron Mitchell Restaurants, (614) 621-3663 or www.cameronmitchell.com

The Mitchell File

Born: Columbus, Ohio.

Education: Culinary Institute of America, Hyde Park, N.Y.

What was your first job?

A dishwasher. I was a junior in high school, and I was about 16. It was at the Cork ‘n Cleaver steakhouse. It’s not around anymore; it was an old chain from years back. I learned to fall in love with the business, and I worked my way up.

Whom do you admire in business?

I’ve had lots of mentors and people but Herb Kelleher of Southwest Airlines is probably one of my big heroes, as is the late Dave Thomas of Wendy’s. There are just a lot of great people out there; also Jim Collins, author of ‘Good to Great.’

What is the best business advice you ever received?

Surround yourself with great people. Get the right people on the bus.

What is your definition of business success?

Building a company that is able to give back to the community. Help others build their businesses. Have your people build their careers and be successful with you. And reward your partners.