Will wage woes hurt the value of restaurants?

Bob House

“Main Street” businesses, just like Fortune 500 corporations, are directly affected by federal and local government regulations. Changing laws can have a big effect on small businesses profitability, as well as future business sale outcomes. One of those regulations currently in the spotlight around the country is the minimum wage rate.

Many cities and states around the country have already successfully increased their local minimum wage rate and many others are considering it. San Francisco and Seattle were some of the first and largest cities to raise their local minimum wage, encouraging others to follow. Just last June, Los Angeles voted to raise its hourly minimum wage to $15 by 2020, and New York state recently passed plans to gradually raise the minimum wage of fast-food workers to $15 an hour. Even high profile corporations like Walmart and McDonald’s have reacted to the trend with their own hourly wage initiatives.

Now the federal government is getting involved. In June, the White House proposed raising the federal overtime salary threshold from $23,660 a year to $50,440, meaning any employees making less than that $50,440, will be paid 1.5x their hourly rate for any hours they work over 40 in a single week. This move would affect nearly five million workers, mainly at the manager level.

It’s no surprise that restaurant and small-business owners have mixed feelings about these changes. A recent survey by BizBuySell found that 64 percent of small business owners oppose a higher minimum wage hike. With issues as impactful as this, it’s important to consider both the positive and negative implications.

A common argument among many advocacy groups and industry associations is that independently owned restaurants do not have the resource cushion of national chains to absorb higher labor costs. While national chains or restaurant groups may be able to offset higher wages by raising prices, that’s a much riskier move for local restaurants that depend on customer loyalty.

The National Federation of Independent Businesses also argues that the federal overtime proposal will force owners to reduce the weekly hours and benefits of their managers. Other owners have expressed concern that a higher minimum wage will necessitate pay increases for more skilled employees, which in turn will force them into layoffs and hiring freezes in order to manage expenses.

Restaurants often operate on thin margins. To maintain their business value following a wage hike, many owners may feel the pressure to boost productivity. Owners planning to sell their companies in the near future will need to prove their business is profitable—despite such regulations—to attract buyers and healthy sale prices.

Even with the hit to increased operating expenses, many restaurant owners and advocates believe that in the long run the effects of wage hikes and expanded overtime benefits would exceed any upfront risk.

In a 2013 poll by Small Business Majority, two-thirds of owners believe a higher minimum wage would boost sales and increase consumer demand. With pay increases, hourly employees will have more spending flexibility. Ideally, workers will then direct that spending to area small businesses, strengthening their local economy.

Many also argue that new and proposed labor laws will help restaurants build stronger workforces. Restaurants can avoid spending the money needed to replace and train new workers by enticing current employees to stay with better pay and benefits. Higher wages may also help restaurants looking to attract more skilled, qualified applicants who can boost their business’ productivity and customer service capabilities. In the long run, restaurants with talented and engaged staff will consistently attract more potential buyers than restaurants with high turnover and indifferent employees.

Ultimately, the minimum wage hikes and overtime proposal are only the beginning of what will probably be a series of U.S. labor law transformations. Instead of getting caught up in the initial hubbub, owners should take a thorough approach to assessing how these changes will impact everyday operations and their future sales goals.

Applying quick response tactics—like raising customer prices—may help reduce problems now but could decrease a restaurant’s value over time. Owners who instead take the time to understand all sides of the issue will be able to adapt to new rules in a way that supports their staff, customers and a future business sale.

Bob House is group g.m. for BizBuySell.com and BizQuest.com, the Internet's largest and most heavily trafficked business-for-sale marketplaces.