November 15, 2019

The Effect of an Increasing Minimum Wage on Business Valuations in the Fast-Food Industry

By Joseph DeCusati, CPA, ABV, ASA, CFE, Partner, Valuation & Litigation Support

Contributor Elizabeth Ciccone, ASA, Esq., Director, Valuation & Litigation Support

Related Services Advisory, Litigation & Dispute Consulting, Valuation, Forensic & Litigation Services, Valuation

Related Industry Litigation Support

The Effect of an Increasing Minimum Wage on Business Valuations in the Fast-Food Industry Advisory

As a result of legislative efforts, ballot measures, and adjustments for inflation, 20 states increased their minimum wage in 2019.

These increases, ranging from a $0.05 per hour inflation adjustment to a $2 per hour statutory increase, will impact 5.2 million workers this year. For minimum wage laborers who work the entire year, the impact on their annual pay will range from $90 and $1,300, according to a recent Economic Policy Institute report1.

Many companies in many industries will be affected to some degree by the rising minimum wage labor costs. Fast food restaurants are among those most likely to be impacted.

Minimum wage costs have long been a critical issue in the fast food service industry. Labor unions organize workers to fight for better wages, and as a result, several cities across the United States have experienced strikes by fast-food employees in recent years.

The recent increases in minimum wages have led restaurant operators with low profit margins to question how much they can afford to pay employees while remaining profitable.

Some restaurant owner industry organizations are opposed to minimum wage hikes, believing they will negatively impact restaurant profitability.

Connecticut Update

On May 17, 2019, Connecticut lawmakers passed House Bill 5004, “An Act Increasing the Minimum Fair Wage,” which raises the state’s minimum wage, in increments, to $15 per hour by 2023.

The Connecticut minimum wage, as of December 31, 2018, was $10.10 per hour. House Bill 5004 mandated the following increases:

Date Minimum Wage
October 1, 2019 $11.00
September 1, 2020 $12.00
August 1, 2021 $13.00
July 1, 2022 $14.00
June 1, 2023 $15.00

Owners of fast-food enterprises have expressed significant concern about the effect that the passage of House Bill 5004 will have on their cash flows from their investment.

Wage expense typically represents one of the most significant expense items on a fast food company’s income statement, which, in turn, represents a decrease in future earnings and profits. As a result, the potential impact of the legislative changes to the minimum wage laws should be considered in a business appraiser’s analysis. The most likely areas where business appraisers will consider the effect of the changes to the minimum wage would be projected future growth rates and consideration of the unsystematic risk premium included in the equity discount rate.

Since changes to local minimum wages are often established by state law, an appraiser should be aware of the phase-in of each state’s minimum wage escalation rates when preparing a business appraisal.

Source

1. Economic Policy Institute: https://www.epi.org/