The North Star Metric
Alan Pentz writes that the key to saving his business was coming to understand the relationship between his revenue and his cost of labor.
Good Morning!
Here are today’s highlights:
In California, customers can now sue restaurants over their service fees.
Chicago is offering big subsidies to try to resuscitate its downtown.
A judge has tossed a lawsuit that sought to block a grant program for minority-owned businesses.
MANAGEMENT
Alan Pentz credits his mentor, Greg Crabtree, with saving his business: “I found Greg when I was at one of my lowest points in business. We were losing money and piling up debt on our line of credit. As a result, I wasn’t sleeping well and had plenty of time to cruise YouTube in search of answers. Late one night, I found one of Greg’s talks that focused on the importance of labor to your business. You might not think this is a stunning insight but for me it was as if the heavens had opened and a ray of truth illuminated the dark night.”
“What I realized was that we were floating people we had no work for and the sooner we confronted that reality, the better it would be for us. Of course, we sort of knew that already, but what Greg made clear is that the numbers were letting us lie to ourselves.”
“Go look at your own profit and loss statement. You’ll see labor spread across multiple accounts. That P&L was developed to pay your taxes, not help you run your business. If a number is important it shouldn’t require you to hunt and peck to find its components and add them all up. It should be staring you in the face every day. That was Greg’s fundamental insight.”
“Labor is almost every company’s biggest investment/expense so you should focus on managing it and using the right metrics to measure it. That’s where labor efficiency comes in. It’s a North Star metric for almost any business. Greg calls his metric the Labor Efficiency Ratio.” READ MORE
REGULATION
In California, customers can now sue restaurants over their service fees: “The Southern California restaurateur Kwini Reed has spent years tying herself — and her business model — in knots trying to meet the competing needs of her customers and her staff. Sometimes it seems like everything from state law to inflation is conspiring to force her to charge $35 for a hamburger, which Ms. Reed says she won’t do, even if it means she and her husband, the chef Michael Reed, take a financial hit. The only fee at their Los Angeles restaurant, Poppy and Rose, is a 20 percent automatic gratuity for large parties, which helps ensure her servers are fairly compensated for tables that demand more skill and time. Now, a new state law in California, which goes into effect July 1, makes those charges illegal. If Ms. Reed continues the practice, a customer could sue her.”
“‘It’s a slap in the face for business owners in California,’ Ms. Reed said. ‘We have so many other ways we can be sued for no reason. We don’t need another lawsuit that is just going to incur more fees, which could put someone on a path of closing. As a human being, why would you do that?’”
“Restaurants can still charge whatever they like, but those charges must be reflected in the menu prices, according to the state attorney general office’s latest guidelines. Restaurants will also have an opportunity to correct errors, according to Elissa Perez, a spokeswoman for the California Department of Justice.”
“Kwini Reed said the idea of categorizing her service charges as ‘junk fees’ demonstrates a larger misunderstanding of the economics of running an independent restaurant. ‘Everybody believes everyone who owns a restaurant is making millions of dollars like the McDonald’s C.E.O.,’ she said. ‘It’s Friday night, I’m at your table — if I was making all this money, would I be here? We have to start sharing the narrative of separating small business from big business.’” READ MORE
POLICY
Chicago is offering big subsidies to try to save its downtown: “The city is going beyond any other in providing public subsidies to convert obsolete office space into apartments and hotels, despite enormous budgetary challenges. Even Chicago’s politically progressive mayor signed on last month. The city’s office market has been hurt by weakening demand, higher interest rates and difficulties in refinancing. Big companies such as Citadel and Boeing have moved their headquarters elsewhere, and Chicago commercial-property values have plummeted.”
“Average asking rents haven’t fallen much, but partly because so many landlords are facing financial difficulties, the available supply is shrinking. ‘There are fewer landlords competing for tenants because so many buildings are in this zombie state,’ said Michael Reschke, a leading Chicago developer.”
“Under the plan—the most generous in the country—the city will provide $150 million to property developers to convert four buildings in the heart of the business district to more than 1,000 apartments, as long as about one-third are set aside as affordable units. The Johnson administration is in discussions with other landlords to add their properties to the program.”
“Chicago is fortunate in having many buildings developed before World War II that have the right design for conversions. Many of these properties currently face financial distress, but those problems could pave the way for conversions. Their eventual resolution will likely involve a new owner paying a discounted price, which would make a conversion more financially viable.” READ MORE
Philadelphia is considering boosting its downtown by creating a welcome district for immigrants: “A group of Philadelphians have an idea they think can lift Market Street East, the central commercial corridor that’s suffering under the triple weight of vacant stores, empty offices and vanished foot traffic. They want to make it the site of a ‘Welcoming District’ for immigrants, the people whose steady arrival is fueling job and population growth in Philadelphia. Such a district could centralize services in housing, health care, employment, and language access, while cementing Philadelphia’s status as a city that embraces newcomers from around the world.”
“At the same time, the flow of new people could help support existing businesses in Market East, which lost customers and commuters amid the Covid-19 pandemic. And immigrants are job-creators, starting businesses at far higher rates than native-born Americans, which also could benefit the area.” READ MORE
REAL ESTATE
Slow sales and new rules are causing agents to flee: “An industry that swelled with newcomers in 2020 and 2021 has recently experienced a harsh slowdown — leaving the field no choice but to downsize, experts say. One widely cited analysis predicts that as many as 80 percent of the country’s real estate agents could find a new line of work.”
“The Bureau of Labor Statistics recorded 440,000 full-time real estate agents and brokers in 2023, about 72,000 fewer than the year before. As of mid-April, the National Association of Realtors had about 1.5 million agents registered. That’s down more than 100,000 from 2022, according to Nick Gerli of the real estate data firm Reventure Consulting.”
“A survey of about 2,000 real estate agents conducted by the Consumer Federation of America found that 49 percent of them sold fewer than two homes in 2023. And Realtors will soon face new rules that could result in sweeping changes to how they do business and how they get paid.”
“Under the new rules starting in August, real estate databases no longer will include offers of compensation for buyers’ agents. That means those agents can no longer count on a cut of the seller’s windfall. Investment bank Keefe Bruyette & Woods has estimated that as much as 30 percent of the total U.S. commissions revenue might be lost as a result.” READ MORE
The combination of 30-year mortgages and rising interest rates is preventing American homeowners from moving—but there may be a solution: “One estimate suggests the lock-in effect prevented more than 1 million people from selling their homes in the span of just a year and a half, a steep toll considering about 5 million homes exchange hands in a typical year. ... But it doesn't have to be this way. The answer to our problems may lie thousands of miles away … in Denmark. Many homeowners in Denmark, like their American counterparts, enjoy 30-year fixed-rate mortgages. But thanks to a quirk of their housing-finance system, Danish sellers are able to earn a profit when they trade in their low mortgage rates for more-expensive ones, making it easier to move even when rates rise. As a result, the Danes dodge the lock-in effect entirely.”
“When a bank gives a mortgage to a homebuyer, it creates matching bonds that it sells to investors. The bank gets cash to extend more loans, and the owners of these covered bonds get a steady stream of payments from the people paying back the mortgage. The value of the bonds, and therefore the value of the underlying mortgages, rises and falls like any other asset traded in the financial markets.”
“Here's an example in dollars: Let's say the face value of a mortgage, or the amount a homeowner would have to pay to get rid of it, is $500,000. But then interest rates rise by, say, 4 percentage points. In the U.S., this turn of events would trap many homeowners in their house; they would have to not only pay back the $500,000 but get a new mortgage with higher interest payments.”
“In the Danish model, the same situation could work out in the homeowner's favor. That's because as general interest rates rise, the market value of the covered bonds, and therefore the underlying mortgage, drops. So instead of having to pay back the entire mortgage, the Danish homeowner could go out and buy back matching bonds for, let's say, $400,000.” READ MORE
LITIGATION
A judge has tossed a lawsuit targeting a grant program that supports minority business owners: “The decision, handed down by the U.S. District Court for Northern Ohio, found plaintiff Nathan Roberts, owner of Cleveland-based Freedom Truck DIspatch LLC, lacked the standing to sue the companies over a grant program it offered to Black small-business owners to purchase a new truck. The plaintiff alleged the grant program violated anti-discrimination laws. Ultimately, the court decided, Roberts did not suffer an injury that would allow him to sue and seek damages — and, thus, it decided to toss other legal and constitutional questions that were part of the lawsuit.”
“Hello Alice co-founder and President Elizabeth Gore said in a news release she was thrilled with the outcome. She previously outlined what she felt were the dangers of the lawsuit, including chilling the desire of large companies to offer their own grant programs and ridding them of a useful way to strengthen their own supply chains.”
“The lawsuit against Hello Alice is part of a broader attack on small-business programs targeted at minorities or other disadvantaged groups. The city of Alexandria, Virginia, was sued over a grant program in 2023, and it ultimately agreed to scrap it. Separately, Atlanta venture firm Fearless Fund was sued over its program for Black women entrepreneurs.”
“The Small Business Administration lost a court challenge on the basis of race — a lawsuit against a prominent small-business rescue program known as the Restaurant Revitalization Fund during the height of the Covid-19 pandemic. The $28.6 billion grant program first opened its application process to underserved, economically disadvantaged business owners, then to all owners.” READ MORE
THE ECONOMY
A Fed study warns that extreme heat will stifle the economy: “The construction sector is likely to determine the overall vulnerability of U.S. production to extreme heat, because of the industry’s significant contribution to economic output and its substantial share of outdoor workers, said the paper, which examined the impact on capital stock, or the value of accumulated investment.”
“The study projects outdoor workers’ future vulnerability to heat stress, measured in days per year above safety thresholds for what is considered ‘heavy work.’ That figure is set to rise substantially by the end of the century, from 22 days in 2020 to about 80 by 2100, according to the authors’ projections.”
“The researchers compared the size of capital stock in two scenarios. In one, there is no increase in extreme heat exposure after 2019, and in the other, the number of extreme heat days increases to 80 by 2100. ‘We find that future increases in extreme heat would lower the capital stock by about 1.4 percent in 2100 and by 5.4 percent in 2200,’ Casey, Fried, and Gibson said.” READ MORE
THE 21 HATS PODCAST
How to Sell a Business That Won’t Sell: We’re calling it a We-SOP. The term, coined by Jay Goltz, refers to a business transition that is something of a do-it-yourself ESOP, or employee stock ownership plan, but without the expense and complication and debt of a full ESOP. It’s a transition that lets owners get money out of what has been their life’s work. It’s a transition that lets loyal employees keep their jobs and preserve the company’s culture. And it’s a promising solution for the Silver Tsunami of retiring Baby Boomers because it can provide a sales path even for owners who have never managed to extricate themselves from their day-to-day operations.
And in this week’s episode, we take you through an example of how it can work. Jay introduces us to Jill and Paul Choma, co-owners of a business, Gilded Moon Framing, that Jay recently guided through the We-SOP process. As you’ll hear, all three believe that what has worked—at least so far—for Jill and Paul could also work for many other business owners.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren