Who's Down With P.P.P.?
In the early days of the COVID-19 outbreak, breweries were forced to react both for the safety & wellbeing of their employees, in addition to the long-term viability of the business. Unfortunately, these two motivations contradict each other in the short-term. While government intervention was likely, it was impossible to know how soon and the extent to which it would provide relief. Small wins started piling up via the Families First Coronavirus Response Act, SBA Disaster Relief loans, tax deferrals, and varying flexibility offered at state levels. These were all “nice to haves”, but didn’t move the needle toward saving the million+ businesses and tens of millions of jobs in desperate need of help. Then the Feds came to agreement on the $2 Trillion+ CARES Act which included $349 Billion for the Payroll Protection Program (PPP), leading me to wonder:
Let’s try something a little different today. How about we kick off this post with a little Naughty By Nature’s OPP while reading my altered lyrics below:
The Premise
As a business owner or decision-maker evaluating the effectiveness of PPP loans, it’s important to remind yourself over and over again what PPP stands for…Payroll Protection Program. It’s not a bailout to save the business, for now it’s mostly an incentive to protect the workers. The cash quickly becomes “Other People’s Property” (O.P.P.), if you will.
The process begins by figuring out how much you can borrow, which will be at a friendly, fixed 100 basis points (1.0%) interest rate over two years. The maximum loan calculation is the most straightforward part of the program and is capped at $10 Million per business.
Alternative to the 2019 Payroll Number, you could use the last 12 months (i.e. 4/1/2019 - 3/31/2020)
The payroll number allows businesses to include a lot more than just wages too. It considers health benefits expense, retirement benefits expense (e.g. 401k match), and even reported tips. Why tips when the company isn’t the one who paid them out? Because this payroll number will also serve as a benchmark as businesses will be compensated for maintaining their employees’ income. Tipped employees like Brewpub servers could become hourly employees under these circumstances, like helping on the packaging line or making deliveries. That means that the rate paid by the company would increase to compensate for the work being done and lack of tips. So including tips makes the capital available to replace most/all of those employees’ pay.
A few numbers must be backed out of the 2019 payroll number, like non-US employees and the portion of any salaries that exceed $100,000 when annualized, but otherwise it’s pretty straight forward.
Ask Forgiveness Later
While no payments will be due until 6 months into the loan, interest will accrue during that time. Nobody preparing for this program is thinking about paying the loan back though. Instead, they’re dialed in on getting the majority of it forgiven, which is what can make PPP a game changer in the short term.
Upon the loan’s origination date, a crucial 8-week measurement period will begin where the business is on the clock to spend that loan amount on a limited number of qualifying expenses. Expenses eligible to be forgiven during this window are among the most relevant today and are as follows:
Payroll with the same $100K employee limitations, plus Healthcare and Retirement Benefits, and Employee Vacation (PTO), Parental, Family, Medical, and Sick Leave
Rent
Interest on other Debt, including Mortgage Interest.
Utilities (Water, Gas, Electricity, Waste Removal, Cable/Internet/Phone, etc.)
So to the extent that your payroll, rent, utilities, and interest for 8 weeks doesn’t exceed 2.5 months of payroll in 2019, you get that much expense covered by the Small Business Administration (SBA) by having the loan forgiven.
One key hitch is that 75% of the forgivable amount of the loan must fall in the payroll bucket. An urban business with high rent and very few employees won’t receive as much relief on the rent & utility side as a more scaled business with a lot of employees and lower proportional rent. While unfair to some businesses, this is why I continue to remind myself that this program isn’t named after rent, utilities, and certainly not raw materials. It’s for Payroll.
Let’s Rap
I’m an optimist, but a pessimistic side of me wasn’t expecting this much relief to be on the table so fast, despite how badly it was needed by the small to midsized business communities. Considering how divided our political parties are, I’m relieved that PPP is available for the next eight weeks. Despite last minute changes to the program which raised interest rates from 0.5% to 1.0% and restricted 75% of the forgivable loan amount to payroll expenses, there’s a lot of positives for a lot of people. I’m in.
That being said, we’re approaching the one month mark without the ability to sell kegs to bars and restaurants, draft pours direct-to-consumers, nor on-site food. These three hospitality-focused channels are not only the core for most members of the beer industry, they’re what employs the majority of workers. With 8,000+ breweries utilizing varying combinations of business models, some stand to benefit more than others from PPP.
The most insulated companies would probably be those who contract brew (or alt-prop) and have sales skewing heavily or completely towards cans or bottles. Given the uptick in packaged beer sales being drank at home, these breweries may even be thriving at the moment. Without the overhead, there isn’t a good case for needing to tap into PPP’s limited funding. So I hope these business take the certification seriously that “current economic uncertainty makes this loan request necessary to support the ongoing operations of the applicant”.
The program’s forgiveness component has the potential to really help breweries who, despite losing their draft business, are still able to produce packaged beer and capture a meaningful piece of their gross margin from beer sold to-go and in stores. Many are seeing a surge in those sales, though they’re certainly still hurting overall and the temporary bump is expected to level out as consumers are stocked up and the recession behavior kicks in. Free rent, utilities and labor, including the essential workers that are still working hard to produce beer might be just enough to make these next 8 weeks bearable on the financials.
Where this argument gets tripped up is when the brewery relies too heavily on the most profitable sales mechanism out there, the direct-to-consumer draft pour. Many breweries are known for that in-person drinking experience and service that can only be captured inside their taproom. Sure, breweries in some states have been granted more legal flexibility than they’ve ever had at their disposal to pivot to new business models on the fly. However, if it’s not what they’re known for and they’re more of a destination relying on out-of-town visitors, the opportunity is probably limited. In this instance, PPP continues to do its core job of getting employees paid, but the free rent does little for the business’ long term prospects of weathering the storm. It merely kicks the can down the road for eight weeks.
The least insulated brewery model and one that I fear for the most would be the brewpub, particularly those without a canning or bottling line. If the restaurant experience was relied on for most of their margin, the alternatives being experimented with now are unlikely to move the needle. These businesses typically need the most amount of labor to clear what’s usually the least amount of income at the end of the day. PPP gets their staff off unemployment and back to a full wage, even compensating them for their tips for an upcoming eight weeks. But then what?
The free rent, which is producing little to no revenue, has the potential to be forgiven to the extent it doesn’t exceed 25% of the loan amount. But that doesn’t help a business and its owners who are looking down the barrel of a time period that will far exceed 8 weeks of distress.
So, WHo’s Down With PPP?
That depends about whether we’re talking about the short-term or long-term. PPP was written up by people who not long ago thought we’d be back to normal by Easter, so it’s not surprising that they would also think 8-weeks of payroll and rent would be sufficient. It’s not. It does address some important short term concerns, buys time, and for that, I am extremely thankful. However, the fallout from the COVID-19 virus is going to be devastating far beyond the last four weeks and next eight upcoming. If this stimulus is just a band-aid to get us through the first three months, then great, but let us know when the ambulance is dispatched.
Thanks for reading, commenting, and sharing. Please be aware that this post doesn’t cover every in & out of the PPP Program. Interested business owners should read the entire Interim Final Rule & FAQs and contact their bank and accountants. This post was intended more so for industry members not involved in the application to get a simpler overview of the program, to share my take on its benefits and shortfalls, and to try to have a little fun while doing so.
Please call your legislators at every level (local, state, federal) and make sure they know that PPP is not enough.
-Doug