‘I’m a Little Embarrassed How Easy It Was’

The owner of a Texas burger chain decides to adopt the $15 minimum.

Good morning! Please note: the Morning Report will next be published on Tuesday. Have a wonderful Memorial Day weekend.

Today’s highlights: Angel investors are getting younger—a lot younger. Does it still make sense to test job candidates for marijuana use? Plus: how the Biden tax plan could (inadvertently) encourage more ESOPs.

GOVERNMENT SUPPORT

The $28 billion restaurant grant fund is disappointing a lot of restaurants: “The agency’s Restaurant Revitalization Fund received more than 372,000 applications, seeking $76 billion — far more than the fund has available, the administrator, Isabella Casillas Guzman, said at a House Small Business Committee oversight hearing. ‘There will be significant demand unmet at the close of this program,’ Ms. Guzman said. The agency stopped accepting applications for the grants on Monday.”

  • “Congress created the restaurant fund in March and ordered the agency to prioritize applications from women and veterans, as well as minority business owners who meet certain income and asset limits.”

  • “More than 208,000 applications met those requirements and will be funded first, Ms. Guzman said.”

  • “Representative Jim Hagedorn, Republican of Minnesota, criticized the prioritization system as discriminatory. Those who won’t make the funding cutoff ‘happen to be, let’s just be honest with it, white men that own bars and restaurants.’” READ MORE

LOGISTICS

This is an especially challenging time to move: “More than seven million households moved counties last year, up almost half a million households from 2019, according to a Wall Street Journal analysis of U.S. Postal Service data, as the option of remote work helped speed a shift from bigger cities to suburbs or smaller metro areas. The pandemic has compounded a yearslong shortage of truck drivers, as training schools temporarily closed and then pumped out fewer graduates. Demand for drivers has surged as the U.S. economy recovers, boosting freight volumes. Moving companies in particular are struggling. It takes a special breed of driver to handle customers and a crew, moving-industry officials and executives say.”

  • “‘Every single company is having a hard time,’ said Katie McMichael, director of the moving and storage conference for the American Trucking Associations, a trade group.”

  • “UniGroup is working hard to take care of the drivers they do have, he said. Last year, the company called to thank each of its 5,000 drivers while they were en route.”

  • “It also sends drivers on their way with care packages, the contents of which are trade secrets, according to Mr. Waite. Other companies said goody bags include items such as deodorant and wet wipes.” READ MORE

TAXES

The Biden tax plan could give a big boost to ESOPs: “The tax provisions of the Biden administration’s American Families Plan would provide a substantial, if unintentional, boost to employee stock ownership plans (ESOPs). The proposal would significantly increase capital gains taxes for wealthy individuals, marginally increase the top individual tax rate, and increase the top marginal corporate tax from 21 percent to 28 percent. Additionally, the step-up in basis at death would be removed. Whether the changes are good economic policy or not, or are likely to pass in any form, will be hotly debated. But their impact on ESOPs could be dramatic.”

  • “Let’s take an example of why ESOPs become so attractive in this scenario. Sally sells $5 million in stock to an ESOP. Under the Biden Administration's proposal, her combined state and federal tax is 50 percent, but she buys a portfolio qualifying under Section 1042, allowing her to defer her capital gains taxes. Historically, a balanced portfolio will about double over a ten-year period, so let's say she holds the portfolio for 10 years. and then sells the entire amount. So now she has $10 million, pays $5 million in taxes, and ends up with $5 million left.”

  • “Say instead Sally sold to a competitor for the same amount. She would pay $2.5 million in taxes at the time of the sale and have $2.5 million left. She reinvests in the same portfolio and sells 10 years later for $5 million. She would then pay $2.5 million in taxes, netting her $2.5 million. Even if Sally could sell to the competitor for, say, $7 million, she would still end up ahead in the ESOP scenario.” READ MORE

HUMAN RESOURCES

Here’s what happened when the owner of a Texas burger chain hiked his minimum wage to $15: “We took a really serious approach. How much of this do we put on the backs of our customers? How much on the back of our business? It wasn't that hard. I'm a little embarrassed how easy it was. We increased our prices 2 percent, which means a dime on a burger, a nickel on fries, a dime on a shake. Nobody noticed. That move covered about half of the cost. The company's bottom line took the hit to make up the difference. A lot of our employees got $5,000 more a year because of our wage increase. It changed their lives. There is no doubt that this is better for our business. The quality of employees coming in rose. Our sales are increasing as a result. Our product comes out better. And I get to sleep better at night.” READ MORE

When does it still make sense to test job candidates for marijuana? “The proportion of U.S. workers who tested positive for marijuana in urine climbed higher in 2020 while the overall share of positive drug tests plateaued last year, according to Quest Diagnostics, one of the largest drug-testing laboratories in the U.S. About 2.7 percent of the approximately seven million drug tests Quest conducted on behalf of employers came back positive for marijuana—up from 2.5 percent in 2019 and 2 percent in 2016.”

  • “Overall, the percentage of working Americans testing positive for any drug was 4.4 percent, little changed from 2019, when the rate of positive urine-based drug tests hit its highest level in 16 years.”

  • “Along the way, the shifting legal backdrop and changing cultural attitudes have prompted some employers to stop testing for it while others have quit factoring it into hiring decisions.”

  • “Some business owners say they continue to test for marijuana and other drugs because having the testing policy discourages lying and theft and encourages workplace safety. ‘Drug testing does not make or break your ability to find good people,’ said Edd Hendee, co-owner of the Taste of Texas restaurant in Houston.”

  • “The greater scrutiny of truck drivers’ drug and alcohol use has hit trucking companies just as the pandemic’s strain on logistics networks has also contributed to a tight labor market in the sector ...” READ MORE

AMAZON

Amazon is considering launching physical pharmacies: “It's part of a plan to win over a larger slice of the prescription-drug industry. There is not a concrete plan to do so, and the talks are mostly exploratory, the people said. They were not authorized to speak to the press. Any meaningful rollout of stores could take more than a year, one of them said. Amazon Pharmacy, which launched in November, lets people buy their prescription medications online with two-day shipping if they have a Prime membership.”

  • “There have also been discussions about putting the pharmacies inside of Amazon-owned Whole Foods locations, the three people said.”

  • “Local stores could help Amazon reach more kinds of patients with more urgent needs because of the amount of time it takes to ship medications.” READ MORE

STARTUPS

Suddenly, there’s a whole new community of angel investors: “Earlier this year, Johnnie Yu heard about a new startup looking to raise a small round. He liked the idea, so he cut a check. Yu is 21 years old and a junior at New York University. He’s also an  angel investor, funding startups at their earliest stages. His investments are small—usually around $2,500—but they’re real: In exchange for the money, he gets a fraction of future equity in the companies, should they succeed. He sees his investments in emerging tech startups as a way to complement his parents’ portfolio, which is made up of more traditional assets like real estate. Yu is part of a growing cohort of Gen Z investors who are beginning to make their mark on the startup ecosystem. Some of them are now old enough to work in VC firms or pursue careers as investors. Others, like Yu, are newcomers to angel investing, as new platforms and recent regulatory changes widen the aperture of who’s eligible to participate.”

  • “Like-minded young people congregate on TikTok and Twitter, where talk of startups can lead to valuable connections and deal flow. A Slack group called Gen Z VC has more than 7,000 members, many of them still in their teens.”

  • “For many of these Gen Z investors, angel investing is less about getting rich and more about participating in the startup economy for the first time.”

  • ‘Everyone obviously hopes to get returns, but most of the time you’re going to lose your money,’ says Dayton Mills, a 22-year-old founder who has started making angel investments. ‘A lot of the time you are buying access, and you’re hoping to get closer to people. That can have bigger effects than your investment itself.’” READ MORE

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THE 21 HATS CONVERSATION

A Skeptical Conversation about ESOPs: “The proponents of employee stock ownership plans can make them sound like the greatest thing ever. With an ESOP, a business owner can take a big chunk of money off the table—or even all of it—while still getting to run the business. And there are some pretty great tax breaks. Oh, and it may even solve income inequality in America. On the other hand, if ESOPs are so great, why are there so few of them? Both Jeff Taylor and Jim Kalb run companies with employee stock ownership plans. Jay Goltz is thinking about implementing one — but he’s got questions, such as: Where does the money to buy the company come from?”

  • “What if you do the ESOP and the business gets into trouble? Does the owner come out okay in that deal?”

  • “Do you need to be a certain size? Do you need to be profitable? What are the key requirements to even consider doing this?” VIDEO AND TRANSCRIPT

If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren