California Economic Forecast – What is the State’s Real Future?



By Bill Watkins, Ph.D.
Edited by Gary Wartik
July 8, 2014

Our colleague, Bill Watkins often offers a view of economic issues that varies from his colleagues. Others offer a good bit of data to support their conclusions about the state of the California economy and how and where it is recovering from the Great Recession. Dr. Watkins offers an analysis with a different approach, as in this article, taking a macro view of the economy buttressed with a thoughtful analysis of why the economy is what it is, and the prospect for change.

Dr. Watkins looks through the ever-present maze of statistics and offers an advanced view of where the economy is going, and most importantly, why long-term we should be concerned about the state’s ability to economically perform. He challenges California’s antiquated income tax system, short-term tax increases to balance the state budget, and the fact that the state’s business community feels over regulated. As a result, new businesses and innovation are often stifled and look to do business elsewhere.

The problem with a California forecast is that there is not one California economy. Instead, we have a group of regions that will see completely different economic outcomes. Then, those outcomes will be averaged and that average of those regions’ outcomes is California’s economy. It is possible, even likely, that no region will see the average outcome, just as we rarely see average rainfall in California.

I expect that, for a while at least, the variance between regions’ outcomes will increase. That is, the differences between California’s fastest growing areas and its slowest (or declining) areas will grow. In general, coastal areas will see more rapid economic growth than inland areas. Even within these broad regions, there will great heterogeneity. Bakersfield, boosted by a booming oil sector, will see stronger growth than Stockton. San Jose, with its thriving tech sector, will see far more growth than Santa Barbara or Monterey. Furthermore, the best performing of California’s inland cities will probably see faster growth than the slowest growing coastal city.

On average, though, California’s economic growth will be far below its potential. In most of the State, it will be disappointingly low to dismal, as California’s economy is held back by well-meaning but seriously flawed regulations. On the other hand, a few super-performing cities may see spectacular growth, at least for a few years.

Eventually, and beyond our numerical forecast, even California’s most vibrant economies will slow, as they are gradually strangled by the lack of affordable housing and the infrastructure necessary to move people from affordable housing to their jobs. People are willing to drive very long distances daily in pursuit of the twin goals of income security and the American dream of a home in the suburbs. The traffic on Highway 14 between Palmdale and Los Angeles reminds us of this twice every working day.

The different growth rates and different levels of economic vitality will exacerbate the vast gulf that exists between California’s wealthiest communities and its poorest. Inequality will increase as California’s fabulously wealthy become ever wealthier and California’s poor suffer in silence, living on whatever aid we give them, denied the hope and the basic dignity that comes from a job and opportunity.

Domestic outmigration will increase, but the people who leave won’t be California’s poorest. Instead, young middleclass people will lead the exodus as they move to where opportunity is more abundant. This, of course, will further increase California’s inequality and decrease its economic vitality.

We will also see an increase in consumption communities. Already, many of California’s coastal communities are reflexively averse to any activity that actually creates value, opting instead to become ever more exclusive playgrounds for the very rich. These communities will see rising home prices, as they severely restrict new units, but will see rising demand, a result of ever greater concentrations of wealth worldwide.

By contrast, some inland areas will see declining home values, as the lack of opportunity drives potential home buyers to places like Phoenix and Houston.

For many of us, this is a depressing forecast, and it is fair to ask about the inevitability of the forecast. It is not inevitable. Few things are. At a statewide level, I hope that representatives of California’s large and growing minority communities demand policies that support the opportunity that previous generations of Californians enjoyed. Absent such demands, California’s policies are unlikely to change.

At a local level, cities would do well to eliminate all local policies that contribute to economic stagnation. This would include resisting demands for increased minimum wages, reducing the delay and uncertainty that burdens almost every economic proposal in California, assuring the ready supply of affordable housing, and having the flexibility to respond to changing market demands.

When a business is making locational decisions, it reviews lists of positive and negatives for the candidate communities. No place has only positives, and few places have only negatives. California cities are endowed with one huge positive; California is a wonderful place to live. That’s not enough, though. A city would do well to minimize the size of the list of negatives.

For businesses, an aggressive minimum wage is a negative, as it raises their costs. Uncertainty and delay in a city’s response to economic proposals increase the risk and costs of a proposal. It’s a negative. Unaffordable housing is a negative, as it increases wage demands and makes it harder for businesses to recruit top talent. The best way for a city to encourage the supply of affordable housing is to allow new-home development.

Finally, areas of economic blight increase crime, raise city costs, reduce city revenues, and are unattractive to businesses considering moving to or expanding in an area. Cities need to be flexible in responses to proposals for these areas. Our work convinces us that we will need less commercial space in the future. Therefore, almost any proposal for dealing with these areas is preferable to inflexible adherence to existing zoning or plans.

California cities are constrained by California policy. That doesn’t mean that California cities are without tools for economic development. Almost any California city is a better place to live than almost any city in, say, Texas. If that can be leveraged by minimized costs, flexibility, and creativity in adapting to the needs of job-creating businesses, a California city, even today, can assist businesses creating opportunity for its citizens.

If your community or company needs an assessment of the economic dynamics within your area, Vision Economics and Dr. Watkins and his team at the Center for Economic Research and Forecasting are available to meet those needs. Please call us at Vision Economics at 805-987-7322 for further information.

California History – The Place of Economic Extremes



By Bill Watkins, Ph.D.
July 1, 2014

Introduction by Gary Wartik: Our colleague, Dr. Bill Watkins at California Lutheran University in Thousand Oaks, CA writes monthly on a number of topics related to the local, California and national economies. Like many, he remains high on California, but points out that a number of factors are hurting the ability of California to remain economically competitive, impacting California’s ability to sustain prosperity. In his view, the Golden State is no longer so golden. This needs to change, and those who operate in Sacramento will benefit from a review of this analysis. He said as much when he addressed the California State Senate last year, one of the few non-elected officials to ever do so. In short, Dr. Watkins calls it like he sees it.

California is a place of extremes. It has beaches, mountains, valleys and deserts. It has glaciers and just a few miles away are hot, dry deserts. Some years it doesn’t rain. Some years it rains all winter. Those extremes are part of what makes California the attractive place that it is, but west of the high mountains, California is mostly an extremely comfortable place to live.

Today, we have some new extremes. Some of our coastal communities are as wealthy as any in the world. At the other extreme, we have some of America’s poorest communities. San Bernardino, for example, has America’s second-highest poverty rate for cities with a population over 200,000.

It wasn’t always this way. For the first 140 years after gold was found, California was the land of milk and honey. It was a place with vast potential, where someone with the right stuff could come, and regardless of their past, they could find, or more correctly build, success.

From the beginning, we’ve had the fabulously wealthy. The new part is the poverty. It used to be the poor were mostly newcomers, people who hadn’t yet had the time to show that they had what it takes. Today, our poverty is dominated by families who have been here a long time. While San Bernardino certainly has some new comers, it is mostly a city of native Californians.

Something changed in the early 1990s. Many analysts will tell you that it was the collapse of the Soviet Union and the resulting peace dividend, which resulted in a dramatic downsizing of America’s defense sector, once a major component of California’s economy.

I believe the way to think about this is that the downsizing of the defense sector exposed the weaknesses in California’s economy as opposed to causing them. Sure, the downsizing had an economic impact. California lost hundreds of thousands of jobs. But, the defense sector eventually bounced back and again became a source of good jobs. Only problem is that it bounced back someplace else besides California. It didn’t come back in California. In fact, it continues to decline in California.

The decline in California’s economic opportunity began way before the 1990s. In the 1960s, Californians, or at the least the ones making decisions, changed their priorities. Where California’s spending for infrastructure once consumed between 15 and 20 percent of the State’s budget, it precipitously fell to five percent or below.

Governor Pat Brown, father of the present Governor Jerry Brown, presided over a fabulous spending boom, on universities, highways, water projects and the like. None of his successors has even attempted anything on that scale. The profound prosperity that accompanied and followed senior Brown’s investment hid the impacts of subsequent policy for decades.

The decline in public capital spending wasn’t the only change, and it wasn’t even the cause of our changed priorities. Indeed the changes in priority caused the change in spending. It is as if we decided that we were wealthy enough, and that future spending would be on social and environmental programs. If we weren’t looking for economic growth, why invest?

Over the past year, California has seen budget surpluses and faster job growth than the average American state. The forces for the status quo now claim that this confirms the wisdom of their policies. They are wrong.

California’s budget surpluses are a product of a temporary tax and an incredible bull equities market. Our dependence on a highly progressive income tax means that California’s fiscal condition swings on the fortunes of a small group of wealthy individuals. Right now, those people are reaping huge profits in the stock markets, and California is reaping huge windfalls in its tax revenues. Someday, the market gains will cease, or worse reverse. Someday, the temporary tax will expire. California’s surpluses will wash away like sand on a beach. The state will face a new crisis.

California’s job gains have been better than the average state’s job gains, but California is not average. Its economy should be performing far better than it is. It should be in top five states for economic growth.

As it is, even the weak job growth we’ve seen is largely a legacy of a previous age. California has the world’s best venture capital infrastructure. This is, in part, a legacy of the investment Californians made in the university system. It is also, in part, a product of chance. An amazing period of innovation was initiated in Coastal California because of a few incredibly talented individuals who were funded by a few far-sighted capitalists. It was one of those few coincidences that happen from time to time and change the world. The eventual result was the Silicon Valley and economic powerhouses such as Intel, HP, Apple, Yahoo, Google, Facebook, Twitter, and many more.

This legacy, too, will eventually slip away, unless California’s priorities change. Already, the Silicon Valley, named because silicon is the primary component of computer chips, no longer produces any chips. The demands for venture capital are also changing. The demands for cash are falling, as new products are often apps instead of something manufactured. This type of investing doesn’t need the infrastructure that the Silicon Valley provides. Increasingly, other communities such as Boston, Northern Virginia, and Houston are becoming centers of technological innovation.

Workers recognize the changes. They may not know the reasons, but they know the impacts, and they are voting with their feet. Domestic migration, migration between states, is a good measure of how workers see opportunity. California’s domestic migration, in a dramatic reversal of a 150-year trend, has been negative for over 20 consecutive years now. That is, for over 20 years more people have left California for other states than have come to California from other states. Workers simply haven’t seen opportunity in California.

California’s economy is limping along far below its potential because of policy decisions. It is performing as well as it is partly because of a bubble in the stock markets, partly because of investments made by our predecessors, and partly because the happy accident that is the Silicon Valley.

If your community or company needs an assessment of the economic dynamics within your community, Vision Economics and Dr. Watkins and his team at the Center for Economic Research and Forecasting are available to meet those needs. Please call us at Vision Economics at 805-987-7322 for further information.

Economists Vary in Their Interpretation of Regular Employment Data Updates– But the Numbers Are Looking Better



By Gary Wartik
Jun 24, 2014

It is well understood that one of the key indicators of the economy’s performance is the rate of job growth and unemployment data. During the last five years, the economy has generated or regenerated nearly five million jobs, although that has not been sufficient to replace all of the jobs lost during the Great Recession. As well, new jobs net of those lost during the Recession are important in order to keep pace with a growing population. In Los Angeles County, for example, the California Employment Development Department (EDD) estimates that the county is still down a net 93,000 jobs from the recession period. Not only do those jobs need to be recreated in a sense, but thousands more are needed to meet an enlarged workforce created by population growth.

With this observation in place, there does appear to be good news to share. The data below from the EDD, and offered with some commentary, follows:

  • The latest employment figures indicate that California added another 18,300 jobs in May. Since May 2013, payrolls have expanded by 2.3%, outpacing the pace of job growth in the United States overall. What’s more, over the past two months California has accounted for 15.9% of all the jobs added in the nation. Still, the jobs added this month represent a decline from the revised 61,200 jobs added in April;
  • The state’s unemployment rate fell to 7.6% in May on a seasonally adjusted basis, representing a 0.2 percentage point decline from April. Helping fuel this decrease was household employment, which increased by 39,800 in the state. At the same time, California’s overall labor force expanded by 4,600;
  • The Leisure and Hospitality sector led California’s job gains last month adding 10,300 new positions to company payrolls, a 0.6% increase in just one month. The Leisure and Hospitality sector has been one of the fastest growing sectors in the state over the past year, increasing payrolls by 2.7% since May 2013. While these figures are encouraging, we note that the bulk of these new positions are in the lower pay ranges;
  • The Health Care and Real Estate sectors also contributed significantly to job gains, adding 9,300 and 1,400 new positions, respectively. Health Care has been another of the state’s fastest growing industries, adding 76,100 new positions since May 2013, a 3.9% increase;
  • The Professional and Business Services sector added to the latest job gains, increasing payrolls by 8,900. The bulk of these jobs were added at Administrative Support companies (7,600) and Professional, Scientific, and Technical firms (3,800);
  • Government sector employment increased in May, adding 3,600 new positions. Gains were concentrated at the State and Local level, where jobs expanded by 900 and 3,700, respectively. In contrast, the Federal government saw their payrolls contract by 1,000 positions this month;
  • Job losses in May were concentrated in the Finance and Insurance sector and the Education Services sector, which declined by 3,000 and 4,300 positions, respectively. Notably, despite the decline over the past month, the Educational Services sector has been one of the fastest growing sectors in the state over the past year, increasing payrolls by 13,300 positions, a 3.9% increase. Much of the “growth” reflects the filing of old jobs that were vacated due to local budget constraints, for which new funding has become available;
  • Regionally, job gains during May were spread across California. In the San Francisco Bay Area, the East Bay led the way with expanding payrolls of 0.8%. In Southern California, Los Angeles County topped the list, expanding payrolls by 0.3%, although the county’s unemployment rate still grew to 8.2 percent from 7.8 percent during April. This was in part due to more people entering the workforce.
  • San Luis Obispo (0.8%) and Fresno (0.6%) also saw their payrolls expand considerably. The fastest growing metro last month was the East Bay (0.8%), and the slowest growing metro was Merced (-1.5%).
  • Among the counties with the lowest unemployment rates were Marin at 3.8 percent, Orange at 4.9 percent, with Ventura County reporting its lowest rate in five years at 5.9 percent. At the other end of the spectrum, Imperial County reported an unemployment rate of 21.1 percent during May, down one-tenth of one percent.

Why Businesses Fail – How You Can to Avoid It



By Gary Wartik
Jun 24, 2014

The Office of the United States Trustee, the office that administers US Bankruptcy Court cases, has reported for years that the failure rate among start-up companies ranges as high as 80 percent within the first two years of operations. The US Small Business Administration offers a different set of statistics, suggesting that the failure rate within the first five years is “only” 50 percent, with only one third surviving up to ten years. Whichever statistics one believes, the failure rate is way too high, and avoidable.

Businesses fail for a variety of reasons. Here is a list of commonly accepted reasons from among business consultants who have studied why many of their clients fail, and what advice can be offered to avoid business failure.

1. Lack of Adequate Leadership

Many business people come to a new business with great business ideas, but they exhibit poor management skills, which can be evident in many forms. You will struggle as a leader if you don’t have enough experience making management decisions, supervising a staff, or the vision to lead your company. Perhaps your leadership team is not in agreement on how the business should be run. You and your partners may be arguing with each other publicly, or contradicting each other’s instructions to the staff. When problems requiring strong leadership occur, you may be reluctant to take charge and resolve the issues while your business continues to slip toward failure.

How to Avoid Leadership Failure: Dysfunctional leadership in your business will trickle down and affect every aspect of the operation, from financial management to employee morale, and once productivity is hindered, failure is only around the corner. We recommend that you learn, study, find a mentor, a business consultant, find a business coach, enroll in training, conduct personal research – do whatever you can to enhance your leadership skills and knowledge of the industry. Examine other business best practices and see which ones you can apply to your business.

2. Lack of Uniqueness and Value

You may have a great product or service for which there is demand, but your business is still failing. It may be that your approach is mediocre or you lack a strong value proposition. If there’s strong demand, you probably have a lot of competitors and are failing to stand out in the crowd.

How to Avoid Value Proposition Failure: What sets your business apart from competitors? How do you conduct business in a way that is totally unique? What are your competitors doing better than you are? Develop a customized approach or service package that no one else in your industry is using so you can present it as a strong value proposition that attracts attention and interest.

This is how you build a brand. Your brand is the image your customers recognize and associate with your business. Your brand identity, including your logo, tagline, colors, and all the visible aesthetics and business philosophies that represent your company should be supported by your value proposition. It should separate you from the pack and present your individual perspective to your customers. Do everything you can to present that unique value proposition to your market so you can capture a market share and begin building your conversion rates.

To publicize your brand and set yourself apart, you will also need to step up your marketing plan and use as many venues as possible to present your brand to the public. You may be far better than your competitors, however that won’t make any difference if your prospects don’t even know that your company is in business. Use social media, word of mouth, cold calling, direct mail, and other tried-and-true marketing techniques. Ensure you have a well-optimized online presence, develop lead generation and contact information capture techniques such as offering high-quality content on your site, a subscriber newsletter, and information giveaways. Professional assistance is also available through a strong marketing and advertising firm.

3. Not in Touch with Customer Needs

Your business will fail if you neglect to stay in touch with your customers and understand what they need and the feedback they offer. Your customers may like your product or service but, perhaps they would like even more, and buy accordingly if you solicited feedback about your product and how customer needs are serviced. What are your customers telling you? Have you been listening? Is the market declining? If so, do the customers remain interested in what you are selling, or are they moving on to a competitor? If your service or product is behind the times, you best act on that information.

How to Avoid Losing Touch with Customers: A successful business keeps its eye on the industry trends and trends in the market place and how they may meet customer needs. Survey customers and find out what their interests are and keep abreast of changes and trends using customer relationship management (CRM) tools. Effective use of CRM can help keep your business from failing.

4. Unprofitable Business Model

Akin to leadership failure is building a business on a model that is not sound, operating without a realistic business plan, and pursuing a business for which there is no proven revenue stream. The business idea may be good, but failure may come in the implementation of the idea if there are no strategic guidelines in place.

How to Build a Good Business Model: Research and review the way other businesses in the industry operate. Develop a complete business plan that includes financial forecasting based on predictable revenue, strategic marketing, and challenge management solutions to overcome potential obstacles and competitor activities. Create a milestone chart with specific tasks and objectives assigned along the timeline so you can measure success, solve problems as they occur, and stay on track. A sound business model that incorporates best practices can help your business avoid failure.

5. Inadequate Financial Management

You must know the source of your revenue and every expenditure that is made if your business is going to succeed. Understanding the cost of goods, and cost of sales is also key, for many companies fail due to a lack of really understanding the cost of doing business. All too many companies are started with overly optimistic sales and profit projections, the result of which insufficient operating capital may doom the company before its first birthday if profits are not generated early in the business life cycle.

Having adequate funding sources at the outset of a new company’s operations is key since most new companies actually operate at a loss for as much as six months before they gain their financial legs. Sometimes people start businesses with immediate success, but they don’t have the skill or interest to manage cash flow, taxes, expenses, and other financial issues. Poor accounting practices put a business at a significant disadvantage.

How to Avoid Financial Mismanagement: Use professional business accounting software to keep records of all financial transactions, including every expenditure and all revenues received, and use this information to generate profit and loss statements. This is valuable information that you need to run your business, know where you stand at all times, and keep it operating in the black. If you lack skill in financial management, consider hiring a tax advisor and professional bookkeeper or CPA to help manage your company finances.

6. Rapid Growth and Over-expansion

On occasion a business startup grows much faster than management is prepared to handle. For example, initial sales are generated at a much greater level than anticipated and suddenly you are inundated with orders you are unable to fill. Or perhaps the opposite is true. You are so convinced that product sales are going to take off that you invest heavily and order way too much inventory and now you are unable to sell it. These are both additional paths to business failure.

How to Avoid Growth and Expansion Problems: Business growth and expansion take as much careful and strategic planning as managing day-to-day operations. Even well-established and successful commercial franchises such as fast-food restaurants and convenience stores conduct careful research and planning before opening a new location. They measure local and regional demographics and spending trends, future development plans for the area, and other pertinent issues before they move forward. You must do the same for your business to avoid failure. Such considerations should be part of any strong business plan, especially the marketing section of that plan.

Conduct thorough research to ensure the time is right and the funding is available for any expansion. Make sure the initial business is stable before expanding to an additional location. Don’t order inventory you are not sure can be timely sold, but have a plan already in place to fill orders quickly should the demand require it. This will require working closely with your suppliers to maintain good inventory balance. The key to successful growth and expansion, and avoiding business failure, is strategic planning.

Fulfilling that great American dream of being one’s own boss, owning your own business, is a compelling one. To succeed, you must clearly define the product or service to be offered and ensure, before starting out, that there is a defined market for what you will offer. Sound planning and fiscal management is a necessity in any new business as well as a mature company. These attributes should be reflected in your business plan, one that reflects good business practices, not just when the business is new, but throughout what hopefully will be a long life.

Conclusion:

Vision Economics offers the services recommended herein as defenses to failure. Failure in a new business, or one that is looking to expand, should not be an option. With strong planning, and professional outside guidance when necessary, the road to success can be well laid that allows for a strong beginning and a long and happy financial life. Please call us at 805-987-7322 for further information.

Gallup Pole Reflects What We Already Know – An Engaged Workforce is a Winning Workforce



By Barry Wolfe, CPA
Edited by Gary Wartik
Jun 20, 2014

Vision Economics works with companies and public agencies on a myriad of projects. During such engagements, we often comment on the workforce with which we work in the effort to improve business performance and business or community service.

The Gallup Organization recently conducted a survey to confirm what many of us instinctively already know. Private sector employees who feel that they are part of a winning team are better employees, producing more and better work product.

As the Gallup Organization found, an engaged workforce provides organizations an edge in battling their competition. It can be an equalizer for small and medium sized businesses (SME’s) when battling larger better resourced competition. And here is the great part for SME’s: According to the Gallup, less than 1/3 of American employees are engaged in their jobs. What an opportunity for visionary business owners and public leaders to clean the clocks of their competition!

What is an engaged workforce? Below is an abstract of a Study and Commentary by Gallup on Human Capital Strategies. The 2nd section of the abstract specifically addresses key elements common to organizations that have high employee engagements. Think of it as a road map to the winners. While the study was conducted only on the private side of the economy, much of what the study reflects also is applicable to the public sector.

Abstract – Study and Commentary by Gallup on Human Capital Strategies

  • Randall Beck and Jim Harter of the Gallup Organization Comments on their study of Talent Practices at Organizations
  • Gallup is one of the U.S.’s premier polling & research organizations; founded by George Gallup in 1935
  • Gallup has spent decades studying human potential and how it can be harnessed to build better companies
  • Certain solutions, when implemented together, can have an even more powerful effect than that of each in isolation. This is called the “additive effect”.In biological and chemical research.
  • The authors identified four human capital strategies that combine to drive up to 59% more growth in revenue per employee.
  1. Selecting and deploying the right managers. Only about one person in 10 has the natural talent to be a great manager.
    For companies, deciding who should be named manager has a ripple effect on everything else.
  2. Select the right individual contributors. Companies that select and develop employees based on their natural talents have an opportunity to accelerate business growth.
  3. Focus on strengths. Building on employees’ strengths is more effective than trying to improve their weaknesses. When businesses select the right managers and employees and build workplace engagement, they gain a serious competitive advantage.
  4. Engage employees. Naturally talented managers play an essential role in creating an engaged workforce. By using the right employee engagement approach, companies see improvements in productivity, profitability, retention, safety, quality, and customer engagement.
  • In 2012, less than one-third of American workers were engaged;
  • An engaged workforce is a tactic to exploit opportunity.

Gallup has found seven key elements in companies that have created extremely high levels of engagement:

  • Have involved and curious leaders who want to improve. (Leaders’ own attitudes, beliefs, and behaviors have powerful trickle-down effects on their organizations’ cultures.)
  • Have a Best in Class HR functions.
    (HR experts teach leaders and managers to stretch and develop employees in accordance with their natural capabilities)
  • Ensure the basic engagement requirements are met before expecting an inspiring mission to matter.
    (When employees know what is expected of them, have what they need to do their jobs, are good fits for their roles, and feel their managers have their backs, they will commit to almost anything the company is trying to accomplish)
  • Never use a downturn as an excuse. (The experience of the 32 exemplary companies we studied calls this rationalization into question.)
  • Trust, hold accountable, and relentlessly support managers and teams.
    (The experiences that inspire and encourage employees are local.. Exemplary companies lavish support on their managers, build their capability and resilience, and then hold them and their teams accountable for the micro-cultures they create.)
  • Have a straightforward and decisive approach to performance management. (The companies in our study with the highest engagement levels know how to use recognition as a powerful incentive currency.)
  • Do not pursue engagement for its own sake.
    (Great employers keep their eyes on the outcomes they need greater engagement to achieve.)

For additional information about workforce development and performance for your company, or a company in your community, please contact us at Vision Economics at 805-987-7322, or Barry Wolf directly at 818-546-3108, or by cell at 805-217-8278.

Opening a New Restaurant? Some Key Legal Considerations for Restaurateurs



By Theodore J. Schneider, Esq.
Edited by Gary Wartik
Jun 17, 2014

Introduction

cook

Over the years, one of the most popular types of businesses in which clients of Vision Economics have expressed an interest involves the opening of a restaurant, or food-associated business, such as a bakery, “coffee house,” or a catering service. There are challenges in opening in any new business, but no more so more than in the food industry.

You may consider yourself a food artist, and you may feel compelled to share your culinary interests and skills with the public. Having great culinary skills, or having such an interest is a good start to the process, but those who want to become a restaurateur also need to understand the challenges of concurrently being a business person. After all, if a good business plan does not also demonstrate that the business will be profitable within a reasonable period, the venture transmutes from a business to a hobby, one in which you may be supporting the hobby rather than the business supporting you.

Two key ingredients to success in the culinary field is adequate financing and a strong business plan. A realistic business plan must demonstrate that the new business will enjoy success within a reasonable period. A hint; generally if the business is not turning a profit by its sixth month of operations, the likelihood of it ever doing so greatly diminishes. As well, as Mr. Schneider notes in this article, good legal planning will also play an important role in any restaurateur’s success.

The Challenge

Each year, approximately 30,000 new restaurants are opened in the United States. Most restaurateurs understand the great risk that comes with these ventures; in fact, some sources estimate as many as 18,000 of the 30,000 restaurants opened this year will fail within the first three years in business. Despite the risk, many chefs and hospitality professionals dive right in. If you’re a hopeful restaurateur, legal planning is an absolute necessity to ensure you don’t fall victim to many of the common mistakes that cause these businesses to fail. Consider the following:

Business Entity

All restaurant owners must carefully consider the best corporate structure for their businesses. Generally speaking, there are four types of structures: a sole proprietorship, a partnership, a limited liability company (LLC) or a corporation. In the case of a restaurant, most owners will want to limit liability, and protect personal assets, should there be a lawsuit filed by a customer or employee. An LLC or corporation is often recommended for restaurants since these limit personal liability. A qualified business law attorney can help you identify which structure is best for your new restaurant, and help you prepare and file all required documents.

Zoning

As any successful restaurateur will tell you, a good location is key to a profitable restaurant. In considering the location of your restaurant, you will want to take into account the local zoning laws. Some areas are restricted to residential dwellings while others may be zoned for commercial use. Do you want to have outdoor seating in the summer? That too may be subject to zoning restrictions. Be sure to carefully outline how you plan to use the space and then identify possible locations accordingly.

Leasing a Space

If you do not have the capital to buy a space for your restaurant, you’ll likely have to rent one. In many cases, costly renovations are required (especially if the space was not previously used for a restaurant). When a significant amount of money is put into the space upfront, it’s absolutely essential that you take steps to protect your tenancy and ensure your business can afford to stay there for an undetermined amount of time. This might mean negotiating a favorable a long-term lease, and including specific clauses pertaining to rent increases. A lawyer with experience in the restaurant industry should be consulted early in the process to ensure your best interests are protected.

Licenses and Permits

Unlike many other types of businesses, restaurants often require a number of licenses and permits from local governing bodies. For instance, you might be required to obtain a license to handle food. If you want to have a bar, you will need a liquor license. Even if you plan to have patron dancing, you may be required to obtain a special permit. An attorney can help you identify exactly what you will need and help you complete all applicable paperwork.

Patron & Employee Safety

To ensure the safety of all patrons, your local governing agency may require your restaurant to undergo regular inspections from the health department. To ensure the well-being of all employees, you should also review all Occupational Safety and Health Administration policies.

Insurance

If you frequent restaurants, you’ve likely witnessed an accident or two – a server spills a hot cup of coffee all over a patron or a bartender slips on some water from the ice machine. With the risk of injury high, it’s absolutely critical that all restaurant owners select an insurance policy which protects the business against lawsuits. In selecting the best policy, speak with an insurance agent and knowledgeable attorney who have restaurant experience to ensure you are protected.

Intellectual Property

No doubt you thought long and hard about your restaurant’s name, signature recipes and even your tagline. Since these components are all critical to your branding and long-term success, you should take steps to protect them. An attorney can help you register the name of your restaurant or food creation as a trademark.

Franchises

If you are purchasing a franchise, you will have even more legal considerations, including the time consuming review of the disclosure document and the often daunting franchise agreement.

Opening a restaurant has its fair share of challenges, especially when compared with many other types of small businesses. By addressing potential legal pitfalls, restaurateurs can focus on operational aspects of their business and enhance their chance of success. It’s absolutely essential that you consult an attorney with experience in the restaurant industry early on to reduce risk and expense down the road. As noted, having a strong business plan is also essential for success.

Conclusion

We at Vision Economics are in the position to assist you as a would-be restaurateur. As well, the attorneys at Schneiders & Associates, L.L.P. in Oxnard are experienced restaurant attorneys, representing many food-service businesses in and around Ventura and Santa Barbara counties. If you are planning to open a new restaurant, relocate a restaurant, purchase a franchise or purchase an existing restaurant, please contact us at Vision Economics (805-987-7322) for appropriate business guidance, and the law firm (805-764-6370) for assistance in navigating the legal process.

Reaffirmation Agreements: Negotiate a Better Deal and Rebuild Your Credit after Bankruptcy



By Rennee R. Dehesa, Esq.
Edited by Gary Wartik
Jun 17, 2014

Introduction

new-balance

Vision Economics has been working with business-related bankruptcy cases for nearly 30 years. That work usually follows an initial effort to avoid a bankruptcy by using the more convenient and more cost-effective out-of-court arrangement, a specialty of this office. The out-of-court or non-bankruptcy approach works best when employed early in a situation before the matter spins out of control. If lawsuits are being filed, repossession actions or attachment of wages, for example are pending, or have already occurred, then a formal bankruptcy filing may be best to put all legal matters on hold.

On the consumer side of the equation, many who find themselves with debt that seems overwhelming seek the assistance of bankruptcy counsel, although out-of-court arrangements may also work well in many instances. For those who utilize the process known as Chapter 7 Bankruptcy, or the “pay-as-you-go” bankruptcy known as Chapter 13 bankruptcy, decisions are often made with respect to treating some debt differently than others. In this article by Rennee Dehesa of the Schneiders and Associates firm in Oxnard, Ms. Dehesa lays out what is involved in “reaffirming” debt in the bankruptcy process, especially when “secured” debt is involved.

The Affirmation Process

Choosing whether to enter into a reaffirmation agreement with your secured creditors is one of the most important decisions you will make during the course of your bankruptcy. The pros and cons must be carefully weighed.

On the one hand, reaffirming a debt affords you a level of certainty, knowing your property will not be repossessed or foreclosed, and providing clarity regarding the payoff balance, monthly payment, interest rate and terms. Additional benefits include the potential to negotiate a better deal during the reaffirmation process and the opportunity to rebuild your credit. Once you re-assume your obligation and make timely payments, those payments will be reported to the credit bureaus thus setting the course for improving your credit in relatively short order.

Alternatively, reaffirming a debt means re-obligating yourself to make those installment payments. Any default on your part could subject you to any and all collection activities, including garnishing your wages.

Once you decide to move forward with reaffirming your secured debt, you must take steps to ensure the reaffirmation agreement is in writing, and signed by all parties and approved by the bankruptcy judge. Simply checking the “reaffirm” box on your bankruptcy Statement of Intention is not sufficient and will not result in a positive signal on your credit profile, nor will it result in any improvement in your credit score.

You and the creditor must execute a formal reaffirmation agreement which documents that you can manage the reaffirmed payment amount. Your attorney must also sign the agreement and state that he or she believes that the reaffirmation agreement is in your best interest. Absent a written reaffirmation agreement, you have no legal obligation to pay and therefore any payments made will have no effect on your credit report.

There is a silver lining, even in bankruptcy. Throughout the reaffirmation process, you may be able to negotiate more favorable terms. Reaffirmation is a new contract between you and the creditor, and need not mirror the terms of your original agreement. Many debtors have successfully negotiated for reduced payoff balances, lower interest rates, or lower monthly payments on contracts for vehicles, furniture, mortgages and home equity lines of credit.

Some lenders are more willing to negotiate these terms than others. While some stubbornly cling to a “non-negotiable” policy, others will see the value in retaining you as a customer and continuing to collect your monthly payments, rather than repossessing and liquidating the underlying collateral for the loan. You never know until you ask, and it is probably best if you have an attorney handle the negotiations on your behalf.

You may cancel a reaffirmation agreement within 60 days after the agreement is entered or your bankruptcy case is closed, whichever comes first. Once you enter into a reaffirmation agreement, it is critical that you fulfill your obligations under the new contract. Doing so will protect your property from repossession, and rebuild your credit score so you can recover from your bankruptcy as quickly as possible.

Conclusion

If you are facing a financial hardship, please give us a call at Vision Economics (805-987-7322) to discuss whether an out-of-court arrangement will meet your needs. On the other hand, if you would like to explore the option of a bankruptcy filing, please contact Ms. Dehesa at Schneiders & Associates, L.L.P. (805-764-6370) for a consultation. For those outside the Central Coast area of California who may need a referral to a bankruptcy law firm, please call 805-987-7322.

Are Banks Lending? Well, That Depends



By Gary Wartik
May 15, 2014

In November 2013, “Raymond,” a future client of Vision Economics, met with a Los Angeles area banker on his own in search of a $175,000 working capital loan. Without being adequately prepared, he was turned down for the loan designed to help in expanding the business.  While Raymond had operated for eight years, he did not assemble sufficient documentation in support of his application. The banker told him that “….we are lenders, we expect to be repaid timely.” “You have not shown an ability to service a new loan.”  Translated, Arthur may have had the ability to service the loan, but he had not demonstrated that ability.  Raymond understandably felt just a little wounded by that meeting, but nonetheless a bit wiser.

This office was subsequently retained to assist with the loan process.  The banker’s response conveyed an important message that the era of more free-wheeling bank lending that preceded the 2008 Great Recession is long over.  Further, every small business applicant needs to understand what it takes to obtain a loan in today’s challenging lending environment.  We met with Raymond over the next six weeks and put together a business plan for the bank’s consideration.  Interestingly, it was his company’s first fully written business plan.

A business plan is one’s roadmap to success, setting out in writing company goals and how those goals will be achieved.  The business plan offers the banker a sense of who the applicant is and what the business is all about.  Any banker is going to be concerned about the stability of the applicant’s business, since instability often leads to loan defaults.  Even in the instance where no loan is being sought, having a current and tested business plan is just plain good business.

A well written business plan allows any lender to see how the sales projections were developed and what profit level can be anticipated.  After all, a banker will reason, profits are what generates the cash to service the loan.  Clear goals and measurable standards of financial performance need to be provided in a good plan, and the strategies to achieving the goals need to be explained in some detail.  As well, knowing who the competition is and how to distinguish one’s business from that of competitors is important.  That is why a good marketing and advertising component is an important part of a successful business plan.

Explainable and defendable long term goals also are central to a strong business plan.  Noting the goals and the approach as to how they will be achieved is important to helping a lender understand the direction in which the business is headed.

Strong financial information is another essential part of any plan.  A projection that suggests that a company’s growth rate will, for example, regularly double, just because the business owner is optimistic, is usually unrealistic on its face.  Realistic projections, supported in the business plan as to how they will be achieved, are of primary importance.

As part of the financial review, it is important that the business plan indicate what the business owner(s) has already invested in the company.  In other words, the bank or any other lender wants to be assured that the loan applicant has some “skin” in the game.  In Raymond’s case, he had already invested a good amount of his own funds in the company, so that was not an issue.

Vision Economics is very experienced in writing business plans that are designed to work.  Especially for a new business, we will tell you if we think that your business vision is not realistic, and what alternatives may be available.  We work with the client, discussing and testing every component of the business plan to ensure that it is realistic and defendable. We know the layout of a good business plan.  We know the essential elements of a plan that bankers want to see, especially the financial ones.

In Raymond’s case the story ended much better than it started.  Ultimately this office and Raymond were able to justify a need and the ability to service a $220,000 loan.  The additional funding allowed for some needed inventory growth.  As well, the extra funding allowed for upgrading of a computer monitoring system, something that this office highly recommended as an important control component of the business.  The bank involved liked what business plans call the “planned use of funds.”

If you are a start-up or relatively new business seeking new or additional non-equity funding for your business, there are a number of options.  Our article by Michael Levy in this month’s newsletter reflects on alternatives to traditional bank lending.  In each case, however, a compelling story in the form of a strong business plan, and/or historical financial data are central to being considered for most loans.

If you have the need for a business plan, and borrowing needs as well, please call the business plan experts at Vision Economics at 805-987-7322.

The Good News – Redevelopment Agencies Initiative Statute May be on November Ballot



By Russ Watson
Edited by Gary Wartik

In February Vision Economics posted an article that highlighted a proposed state initiative titled “The Jobs and Education Development Initiative (JEDI) Act”.  If approved this statue would essentially reauthorize the use of redevelopment powers, including a distribution of tax increment funds. The California “Jobs and Development” Initiative (#13-0065) has been approved for circulation of petitions in California, targeting consideration by the voters on the November 4, 2014 ballot as an initiated state statute. Proponents have to gather nearly 505,000 signatures to qualify for the November ballot.

Reviewing some of the posted stories regarding the proposal, many of the authors, bloggers and those who take the time to comment on articles/blogs are not supportive of the proposal, citing big government, abuse of power, stealing ‘our, your, their’ tax dollars to give to rich developers…the usual comments.  One article suggested this effort might in fact be effective in growing support in the Legislature and ultimately the Governor’s approval in enacting ‘redevelopment-lite’ legislation similar to last year’s SB 1 (Steinberg), to place the initiative on the ballot.

Identifying actually who is supporting the initiative has not provided a definitive list either.  There are a few cities that have openly expressed support, including some financial contributions.  It is likely there are many economic development advocates, affordable housing proponents and possibility many more legal and professional consulting firms supporting the initiative.

The dismantling of redevelopment agencies has proven to be … let’s say ‘complicated’.  Reactivation of former agencies will likely prove to be even more complicated than the dismantling and sell-off of former redevelopment assets and property holdings.  How does one begin to un-ring the loud bell after having been struck by the heavy hand of the Stat?  It started ringing nearly three years ago, and many cities find themselves still fighting to keep what they believe is their residents/community’s property.  The phrase “Kings X” could become a new legal term!

For now, we are in a “wait and see” period to see if proponents are successful in securing the required signatures.  Then, I guess the phrase…’let the fun begin’ may be appropriate to see if voters can be swayed to support a return of the JEDI program.  And then, if approved in November, the real challenge will be how to reactivate a de-activated public entity, restart projects and programs with limited staff, rebuild financial capacity, undo the undoing…and so on.

For our friends and colleagues in the public sector, we at Vision Economics urge you to look at the proposed JEDI referendum with the goal of generating local support for the initiative.  After all, the JEDI referendum is the key vehicle that would return to local government the ability to help fund infrastructure and other projects, including much needed workforce and senior housing, for which adequate funding is likely unavailable now.

We will attempt to keep you posted.  If you have any questions, please call Russ Watson at 916-217-5997, or Gary Wartik at 805-987-7322.

Outlook Strong for the Southern California Luxury Housing Market – Positive Sign for the Local Economy



by Bill Watkins, Ph.D.
Edited by Gary Wartik

In our previous article, we touched upon that portion of the housing market that ranges in prices up to $600,000.  As the article notes, it has been a challenging year for buyers since mid-2013 due to low inventory levels that have contributed to pushing up prices.

In this report, Dr. Watkins focuses on the luxury end of the market.  During the last twelve months, sales of homes above $1 million have fared better, on a percentage basis, than the other end of the market where the vast majority of housing activity occurs.  The importance of the luxury home market is the fact that it draws money to Southern California where it is spent not only on new property acquisition itself, but everything that goes along with a new home.  The ripple effect of expenditures is important to the local economy.  It is also a reflection, as Dr. Watkins notes, of a confidence level in the economy from Southern California all the way up the coastal counties to San Mateo County.

Southern California living, as Mary Poppins would say, is practically perfect in every way. This makes Southern California’s luxury housing markets world markets.  As such, these markets will outperform the local economy.

We’ve seen an impressive run-up in Southern California home prices over the past couple of years.  Much of that run-up was the result of investors purchasing lower-end properties for rental income and expected future capital gains.  This was a necessary correction after the excesses of the housing bubble, but that process has mostly run its course.  I expect to see relatively modest increases or possibly even declines in middle and lower-end markets in the next few years.

Luxury markets are another story.  The key to understanding Southern California’s luxury housing markets is to understand that these markets are not entirely local markets.  In many ways, Southern California luxury housing markets are world markets, and world demand is mostly independent of local economic activity.

Southern California has a rare and attractive combination of amenities and cachet.  Few people would choose to live in Detroit without a strong economic reason, but that’s not true for Southern California.  Southern California is different.  People want to live here, and people who can afford it come from all over the world.   Even in the unlikely event that Los Angeles’ economy went the way of Detroit, people would want to live here.

To be sure, demand can be volatile.  Local demand will fluctuate with the fortunes of local industries.  In particular, we’ll see demand drop when companies leave the region, taking their executives with them.  Unfortunately, these days we seldom see demand increase because a company moves to California.

Eventually though, world demand for Southern California living overcomes local economic conditions.  So, while Los Angeles County may be down hundreds of thousands of jobs from its pre-recession high, its luxury home markets are doing quite well.

World demand can fluctuate too.  During the crisis that followed the 2008 Lehman Brothers collapse, real estate demand decreased almost worldwide.  Most of the decline in luxury market demand was a result of uncertainty, as most of the wealthy, who are the source of the demand, were not really hurt all that much.  Those wealthy with typical balance sheets and outside the finance and construction industries were minimally impacted.  What losses they did experience were recovered quickly with the recovery of equity markets.

So, why did we see reduced demand for luxury real estate?  Because buyers were nervous.  Risk premiums went through the roof in late 2008.  While it turned out that the wealthy generally did pretty well in the recovery, and far better than lower-income people, it was hard to see that at the time.  There appeared to be a real risk of the massive wealth losses among the wealthy, similar to what we saw in the depression.

This is the key to Southern California’s luxury home market going forward.  Regardless of economic conditions, there are always large numbers of wealthy people in America and around the world, and many would like to live in the area.  It’s just a matter of if they are complacent enough to spend the money.  A Southern California luxury home can cost tens of millions of dollars.  Even the very wealthy, perhaps excluding young sports and entertainment figures, only make that large of an investment when they are relatively confident about their continued security.

Right now, they are confident about their future, and that means continued demand for Southern California’s luxury home markets.  I’d say the complacency is probably justified.

That’s not to say that there aren’t risks:  Emerging markets are fragile.  Middle East tension is high.  China’s economy is increasingly risky.  Market participants are concerned about the Fed’s taper.  The United States’ economic growth is slow and volatile.  Still, only the perpetual doomsayers expect another event as disruptive as the events that followed the Lehman Brothers collapse.

I expect that luxury home markets across the country; places like Santa Fe NM, Jackson Hole WY, Lake Placid NY, Carmel CA, and yes Southern California, will outperform typical residential home markets.  Prices and sales are likely to be strong.