Article written by:
Ryan Kilpatrick, CPA, CEPA
Tax Senior Manager
Tobin Perrill, CPA
The GBQ Restaurant team attended the Restaurant Finance & Development Conference in Las Vegas, Nevada, last month. The conference afforded us the opportunity to meet with owners, operators, investors, and other service providers to gain additional insight into trends and happenings in the restaurant industry. Following are our key takeaways from the conference:
- Lease accounting standard has been deferred
- Due to difficulties in implementation of the new lease accounting standard within ASC 842, the FASB has agreed to delay the required implementation date of this standard for private companies by a year to reporting periods beginning after December 15, 2020 (calendar year 2021 for most companies). Although this standard has been delayed, we encourage you to take advantage of this extra time as this standard is complex and tedious to implement.
- The identification of embedded leases will likely be the most intriguing part of ASC 842 implementation
- Recent polling has shown a majority of respondents citing that the identification of embedded leases to be the most significant challenge they have faced when implementing ASC 842. The two criteria necessary for a lease to exist are (1) there is an identified asset and (2) the customer has the right to control the use of such asset which can create the potential for embedded leases in contracts that historically have not been accounted for this way. As a result, the identification of potential embedded leases and the completeness of companies’ lease portfolios will continue to be a difficult challenge with the implementation of ASC 842.
- Labor issues continue to be a concern
- For restaurants that think the labor market could not be tougher, that appears to not be the case. Attrition continues to be high, and in addition to employee headcount, cost budgeting and forecasting continue to be major concerns. In a highly competitive market, keeping prime costs in balance is becoming even more imperative, especially as restaurants are striving for value creation and need that free cash flow to invest in its brand (i.e. new technology, reimaging, etc.).
- The trend of franchisee consolidation should continue
- Franchisee consolidation has been the trend in recent years and this is not expected to slow down. Franchisee consolidation occurs for many reasons with one of the top reasons being that a buyer has an established organization and infrastructure that allows them to deliver a level of professional management and leverage fixed overhead costs in a way smaller franchisees simply cannot match.
- The cutting edge of technology
- New technology has, and will continue to be, developed and utilized for value creation at record rates. These technologies continue to include mobile/online ordering, kiosks/tabletop tablets, rapid pickup, automated purchasing technology and optimized scheduling software among others.
- Perception of value in a changing demographic
- Navigating how to develop concepts and products that appeal to a changing demographic can be challenging, but all demographics still seek value in the product and service they receive. Creating the perfect blend of price, quality, menu innovation, accessibility, speed of service, purpose, and story all play a pivotal role in providing value to a diverse client base.
- Bonus Depreciation appears to be officially off the table for Qualified Improvement Property (“QIP”)
- Perhaps the most profound impact on restaurants as a result of tax reform is that QIP (building and leasehold improvements) is no longer an asset that qualifies for bonus depreciation. Without this benefit, further accelerated depreciation options such as Section 179 expensing and cost segregation studies should be further explored for capital expenditures.
- Proper entity structuring ensures maximum Qualified Small Business Income Deduction (“QBID”)
- Introduced for the tax year 2018, the QBID allows for a deduction of up to 20% of qualifying income from pass-through entities. However, complex rules may prohibit aggregating separate activities to achieve maximum benefits. Operators should carefully revisit existing entity structures and proactively plan on a go-forward basis to achieve maximum deductions.
- Opportunity Zones continue to be an attractive option for new locations
- Opportunity zones offer deferral of capital gains and a permanent gain exclusion on the appreciation of the sale of assets. Investment in opportunity zones is an attractive way to defer tax liabilities and increase ROI on investments in the restaurant space.
- Capital markets continue to flourish, commanding steady sales multiples
- Even with economic uncertainty in the broader markets, capital markets are projected to flourish into 2020. With increasing competition from private equity, independent sponsors, and family offices alike, sales multiples continue to remain strong, specifically within the QSR segment.
Your GBQ team welcomes the opportunity to further discuss these takeaways, as well as share additional thoughts and feedback from the conference. For additional information, please call us at 614-221-1120 or contact your GBQ service provider directly.