Saving Your Restaurant Group – March 27, 2020

The Restaurant Industry much like the Retail Industry has long had too many locations and too many brands that have no current reason to exist (ironically bankruptcy filings often call these “iconic” brands). Now that the impact of the Coronus Virus has shut down the majority of the restaurant business, we are going to see many locations permanently closed and many restaurant brands closed forever. As I told a friend earlier this week, I knew that the Restaurant Industry had at least 20% too many storefronts what I didn’t know was that a pandemic event would close the 20% or more within a 30-day period like we are now seeing.

This short article deals with steps you should take NOW if you own or manage a restaurant group in order to survive. My perspective is one of a consultant that has advised seven separate restaurants franchises and bank groups over the last two years that have been in financial distress. Restaurants are a cash business and so the impact of a restaurant shutdown or business model change to a delivery and takeout only service means that restaurant cash inflows have been drastically cut immediately while payments due employees, suppliers, and landlords will continue to come due for commitments previously made.

  1. Hoard Cash NOW
    a. The only expenses you should be paying right now are as follows:
    i. Payroll and Payroll Taxes
    ii. Health Insurance
    iii. Sales Taxes
    iv. Product Vendors (broad line and local) but push out the pay cycle by at least 2 weeks
    v. Utilities but push out the pay cycle by at least 2 weeks
    vi. Insurances- workers compensation and liability (demand a payment reset based upon reduced payroll and reduced sales), and property
    vii. Critical maintenance capital expenditures
    b. Expenses you should not pay and defer for the next 90 days are as follows:
    i. Franchisor Fees- both royalty and marketing
    ii. Rents
    iii. Property Taxes
    iv. Debt Service- all principal amortization and interest (commercial banks have been allowed to do this by the federal regulators)
    v. All expansion capital expenditures
  • Reduce Payroll and Headcount NOW
    • Assume the government ordered shutdown will continue for at least 30 days and perhaps as much as 60 days
    • Assume the US economy will be in a recession when restaurants are allowed to re-open a
    • Assume sales volumes will ramp up gradually and sales volumes be significantly less when restaurants re-open at between 80% and 90% of prior run rate sales volumes
    • You need to layoff all unneeded hourly employees NOW
    • You need to downsize Administrative and Management employees by at least 20% NOW and be willing to cut much further if needed
    • You need to reduce salaries by 20% for 60 to 90 days except for lower paid employees (suggest a $50K per year minimum threshold)
  • Project your weekly cash flow focusing on the next four to six weeks in full shutdown or limited operations mode – if you run out of cash and can’t fund your payroll, you will likely shut down never to open again. The only two options is for owners to put more cash into the business or for your bank to put in more cash. Unless you as an owner have the cash and are willing to invest it into your business potentially running out of cash may be game over.
    • I realize the federal government is proposing loan assistance shortly but I do not suggest betting your company on this happening fast enough to save your business.
  • Permanently close every marginally profitable restaurant in your restaurant group NOW- you must attempt to consolidate around your best restaurants NOW. If you want to keep open marginal restaurants all you are doing is increasing the risk that even your best restaurants will end up closing permanently.
  • Communicate your actions and plans to your key stakeholders on a weekly basis:
    • Employees
    • Bank
    • Landlords
    • Broad line suppliers
    • Local suppliers
    • Insurance Agents and Brokers

The Corona Virus situation will lock up the capital markets for the foreseeable future meaning that re-financings and going concern sales in virtually all industries will be totally locked up and put on pause. Chapter 11 bankruptcy offers no relief for running out of cash. Restaurant liquidations result in virtually no creditor recoveries as restaurants have virtually no assets that have any significant liquidation value.

Dan Dooley
CEO and Principal
Morris Anderson & Associates, Ltd.
Cell 630-660-8952

Email ddooley@morrisanderson.local
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