The restaurant industry is set to end 2020 with more distressed businesses than it had during the Great Recession, according to an AlixPartners report. As of October, 50% of limited-service restaurants and 63% of full-service restaurants were distressed. Comparatively, at the end of the recession, 33% of LSRs and 17% of FSRs were at risk of not meaning their financial obligations.
"The industry has really taken a beating,"Edward Webb, advisory partner at BPM, said. BPM specializes in accounting, taxes and financing. "[For] independents, particularly the smaller independents, it's really been catastrophic."
Traffic in urban centers has largely disappeared, putting businesses that rely on heavy foot traffic in a difficult situation, Webb said.
Now, with PPP loans all but dried up, a new round of COVID-19 restaurant restrictions and little hope of federal aid until January, restaurant owners and operators face a grim outlook. Many will have to consider whether to close their operations for good.
Restaurant Dive spoke with Webb about what restaurant owners need to know when they consider their next steps whether that means closing down a business, declaring bankruptcy or seeking a sale.
Editor's note: This interview has been edited for clarity and brevity.
INDUSTRY DIVE: What would you tell an owner who might be considering a sale, bankruptcy or winding down operations?
EDWARD WEBB: There are a couple of pretty important steps that they need to go through. One is to make sure they have good, accurate financial information. If they haven't had a good bookkeeping function, or they haven't been able to use an outside accountant, then they need to make sure that their books are cleaned up. There is the immediate cash flow analysis. They need to understand where their cash is, what the demands are short- and medium-term, and then try to ascertain what their sources of cash are. And once that's done, and they've been able to determine how much time is realistically available to them, then they can look at their business model.
They need to ask, "Is the business model that they had previously been operating under effective now?"Assuming that it's not, and it's been negatively impacted by the pandemic, then will it return? Or is there some type of modification to the model that will enable them to become profitable again? And if the answer to that is no, then it really becomes an exercise of what the business owner is looking at. There's an end point to the business and the owner needs to understand how best to enter into that end point. Is it a simple wind down of operations? If there are a lot of creditors out there, if there are leases that are onerous, then that may require bankruptcy. It's driven by the owner's business decision. So they assess the cash, they look at the model, they determine what that next step is and then they figure out what we would call a harvest strategy.
What have been some of the common paths that business owners have been taking as their end strategies?
In situations where the owners can simply wind down, maybe they have a lease that they can get out of, or it's a lease without onerous terms and they're not personally guaranteeing it. If they're able to do that and liquidate their assets, utilize those funds, pay off whatever creditors they have, and basically walk away, that is far and away the easiest, quickest and cheapest path. They will likely need some type of accountant or business professional, and then they'll want a lawyer as well just to make sure that there's no backdoor that somebody can come in and cause problems.
Edward Webb, advisory partner at BPM
Permission granted by BPM
If there are significant liabilities attached, and they really believe they have to protect themselves in bankruptcy, that becomes an expensive and time-consuming process. They can expect it to be a 12- to 18-month process. It's unlikely fees will be less than a quarter of a million dollars and oftentimes more. You really only do bankruptcy in a situation where the personal effect of those liabilities is dramatic. So it's a clearly less-desirable choice.
One thing we haven't seen much of lately and I would expect that to change in 2021 is business combinations. In those situations where there's a healthy restaurateur, who sees an opportunity to either expand their operations or protect themselves in some way, maybe they can get a really advantageous deal. We haven't seen many of those primarily because everyone's afraid to move. Everybody's cautious. I would expect that will ease.
In terms of business combinations, what would an owner need to do to make sure they are getting a good deal and finding the right buyer?
If they have been dealing with an external accountant or some type of business manager, who they really like and they trust, that is really valuable. Ultimately, when you're going to bring two businesses together, there has to be the ability to kind of find that common language and bring the financial side of the businesses together effectively. Once a business owner has gotten their act together financially, and they know where they are, and they have a pretty good sense of where they're going, they can turn to a brokerage that can help restaurateurs find other restaurants or investors and assist them to sell the business. It can be expensive and sometimes you need to be pretty careful about the choices that you make with those folks.
Once you have that data, and it's solid, then you have the flexibility to approach the market. When the time comes to actually put the businesses together, you really do need a financial professional. That can be very difficult for a business owner to do because they have a day job of running the business. There are also potential tax implications, licensing and regulations that need to be looked out for, and so they're better served by making sure they got a pro.
What happens if an owner doesn't have the help of a financial professional for a business combination?
One outcome is there's no deal. The acquiring entity just couldn't figure out how to consume the other because they did not have accurate data and they weren't able to comfortably assume those operations. Then another scenario is the entity without good data can sometimes be taken advantage of and they will not be able to strike a good deal. The seller will find themselves in circumstances where the buyers will say, "Hey, we'll still take it off your hands, but we're gonna pay you less because we don't have this information now."That's pretty typical.
What should owners do to make sure the process goes smoothly?
If you have a case where there is a letter of intent, or some type of intent has been indicated, the buyer is going in to perform due diligence. At that moment, if the seller is fully prepared, if they have pulled their financial information together, they have cleaned up their inventory, they have identified their legal contracts, they are able to prove that they're current on taxes, they have their employee records in place, if all of those things are in order, then it obviously makes it a whole lot easier for the buyer coming in. And the buyers are typically going to be a little bit more sophisticated, because they're the buyers. Since they are able to afford it, they will have professionals of their own.
For example, we will do buy-side diligence on behalf of our clients. And when we go into circumstances where the seller is sophisticated and prepared for what's coming, then buy-side diligence can be very quick and relatively painless. Due diligence is never fun, but when a buyer comes in, and they encounter a seller who is ill-prepared to sell, the control of the negotiations subtly shifts to the buyer.
If the buyer and the seller are prepared, they come together and diligence is complete and everybody's satisfied. The nature of the restaurant business is very short cycles. So those tend to be very clean transactions. The issues are more readily identified, and once resolved, they are put to bed.
What do you anticipate we will see with business combinations going forward?
I believe there is going to be continued pressure, primarily by baby boomers who are reaching retirement age, for them to get out. And so they'll keep pushing on that. And if there are easy transitions that can be made with family members, friends, neighbors, anybody, they'll do those deals. I think that there probably, unfortunately, is going to be an increase in the number of distressed situations, in which there are trailing liabilities owners cannot get away from as the impact on real estate is felt more. The commercial real estate business has suffered maybe more than anything. But the banks aren't pushing it right now. They're not calling loans. They're not getting aggressive. When the banks have to begin doing that, then I think there'll be a trickle down effect, which may lead to increased distressed situations.
See the original post here:
Should you close, sell or declare bankruptcy? What restaurants need to know. - Restaurant Dive
- Alitalia Files for Bankruptcy, but Italy Balks at a Third Bailout - New York Times - May 3rd, 2017 [May 3rd, 2017]
- A Slow Bankruptcy Process Stops Locale-Reviving Jobs - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Bankruptcy auction for property of NASCAR artist Sam Bass ... - Charlotte Observer - May 3rd, 2017 [May 3rd, 2017]
- Obamacare helped make a 50% dent in personal bankruptcies ... - MarketWatch - May 3rd, 2017 [May 3rd, 2017]
- Pennsylvania Toy Seller Files For Bankruptcy - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Puerto Rico Enters Bankruptcy - Wall Street Journal (subscription) - May 3rd, 2017 [May 3rd, 2017]
- Puerto Rico Declares a Form of Bankruptcy - New York Times - May 3rd, 2017 [May 3rd, 2017]
- Farmer Mac Early Exclusive: Farm Bankruptcy Rates Low - AgWeb - June 6th, 2017 [June 6th, 2017]
- Washington weighs in on Westinghouse bankruptcy | News ... - Aiken Standard - June 6th, 2017 [June 6th, 2017]
- 4 Reasons Why Puerto Rico's 'Bankruptcy' Process Matters to US Residents - NBCNews.com - June 6th, 2017 [June 6th, 2017]
- Valeant: There Is Significant Bankruptcy Risk Here - Seeking Alpha - June 6th, 2017 [June 6th, 2017]
- Westinghouse bankruptcy draws federal scrutiny as VC Summer nuclear project's future remains unclear - Charleston Post Courier - June 6th, 2017 [June 6th, 2017]
- Bebe Avoids Bankruptcy Filing With Real-Estate Deals - Wall Street Journal (subscription) - June 6th, 2017 [June 6th, 2017]
- rue21 Bankruptcy Objections Filed - Bankrupt Company News (press release) (blog) - June 7th, 2017 [June 7th, 2017]
- ISH to emerge from bankruptcy as Seacor subsidiary - WorkBoat (blog) - June 7th, 2017 [June 7th, 2017]
- Curtains for the Pearl, as the Theater Company Files for Bankruptcy - New York Times - June 7th, 2017 [June 7th, 2017]
- Bankruptcy fraud earns Pepperell man 18 months | Boston Herald - Boston Herald - June 9th, 2017 [June 9th, 2017]
- Vikki Lindemuth favors appointment of trustee to handle husband's bankruptcy - Topeka Capital Journal - June 9th, 2017 [June 9th, 2017]
- Creditors seek to force bankruptcy of Tinley Park firm - Chicago Tribune - June 9th, 2017 [June 9th, 2017]
- Abengoa Bankruptcy Liquidation Plan Confirmed - Bankrupt Company News (press release) (blog) - June 9th, 2017 [June 9th, 2017]
- Retailer BCBG Unveils Going-Concern Bankruptcy Sales - Wall Street Journal (subscription) - June 9th, 2017 [June 9th, 2017]
- For Hartford, bankruptcy not an easy way out - The CT Mirror - June 9th, 2017 [June 9th, 2017]
- Why Students Should Be Able To Declare Bankruptcy On Their Loans - ATTN: - June 10th, 2017 [June 10th, 2017]
- Bankruptcy forces curtain to fall on community theater - Chicago Tribune - June 10th, 2017 [June 10th, 2017]
- Ex-Pepperell man jailed in bankruptcy case - Lowell Sun - June 10th, 2017 [June 10th, 2017]
- Owner of Joe's Crab Shack files for bankruptcy | Jacksonville News ... - Florida Times-Union - June 11th, 2017 [June 11th, 2017]
- Why test for bankruptcy law is a larger test for India - The Indian Express - June 11th, 2017 [June 11th, 2017]
- Tax trouble firms' most likely road to bankruptcy - Albuquerque Journal - June 12th, 2017 [June 12th, 2017]
- Darius Miles' Bankruptcy Sale Includes Signed LeBron James, Larry ... - Bleacher Report - June 12th, 2017 [June 12th, 2017]
- Winter Haven attorney gets prison for concealing assets in ... - News Chief - June 12th, 2017 [June 12th, 2017]
- Children's retailer Gymboree files bankruptcy, closing up to 450 stores - USA TODAY - June 12th, 2017 [June 12th, 2017]
- Another retailer has filed for bankruptcy - mySanAntonio.com - June 13th, 2017 [June 13th, 2017]
- Esperanza Unida bankruptcy delays city redevelopment efforts - BizTimes.com (Milwaukee) - June 13th, 2017 [June 13th, 2017]
- Square 1 Burgers files bankruptcy, blames over-saturated restaurant market - Orlando Sentinel - June 13th, 2017 [June 13th, 2017]
- Big KC manufacturer files for bankruptcy - Kansas City Business Journal - June 13th, 2017 [June 13th, 2017]
- Canadians Have Been Refinancing To Delay Bankruptcy - Seeking Alpha - June 13th, 2017 [June 13th, 2017]
- Gymboree Files For Bankruptcy, Plans To Close At Least 375 Stores - Forbes - June 13th, 2017 [June 13th, 2017]
- Sears, J. Crew, Claire's Are Bankruptcy Risks (SHLD) | Investopedia - Investopedia - June 14th, 2017 [June 14th, 2017]
- Tampa's Square 1 Burgers files for bankruptcy protection - Tampabay.com - June 14th, 2017 [June 14th, 2017]
- RBI, Banks And NPAs - First, Reform India's Bankruptcy Code, Then Force Defaulters Into It - Forbes - June 14th, 2017 [June 14th, 2017]
- Retail bloodbath: Bankruptcy filings pile up - CNNMoney - June 14th, 2017 [June 14th, 2017]
- Bankruptcy cases show we've become a nation of selective justice - New York Daily News - June 14th, 2017 [June 14th, 2017]
- Soupman of 'Seinfeld' Soup Nazi fame files for bankruptcy protection - USA TODAY - June 14th, 2017 [June 14th, 2017]
- Strack & Van Til bankruptcy case moved to Illinois - nwitimes.com - June 16th, 2017 [June 16th, 2017]
- Lawsuit: Wells Fargo revised mortgages in bankruptcy without permission - USA TODAY - June 16th, 2017 [June 16th, 2017]
- France's CGG files for bankruptcy protection - MarketWatch - June 16th, 2017 [June 16th, 2017]
- 'Soup Nazi' company files for bankruptcy - CNNMoney - June 16th, 2017 [June 16th, 2017]
- France's CGG Group Files for Bankruptcy Protection - Wall Street Journal (subscription) - June 17th, 2017 [June 17th, 2017]
- Company of businessman behind polo facility expansion files for bankruptcy protection - Fauquier Times - June 17th, 2017 [June 17th, 2017]
- Vehicles involved in Dusty Old Cars bankruptcy to be auctioned - WMUR Manchester - June 17th, 2017 [June 17th, 2017]
- Could Illinois be the first state to file for bankruptcy? - CBS News - June 17th, 2017 [June 17th, 2017]
- Takata Said to Ready Bankruptcy Filing Ahead of Sale to Rival - New York Times - June 17th, 2017 [June 17th, 2017]
- Greece escapes brush with bankruptcy but austerity still bites - FRANCE 24 - June 17th, 2017 [June 17th, 2017]
- Pawnbroker A-OK cites embezzlement in multimillion-dollar bankruptcy - Wichita Eagle - June 18th, 2017 [June 18th, 2017]
- Clock is Ticking on India's Bad Bank Debts Under Bankruptcy Laws - Bloomberg - June 18th, 2017 [June 18th, 2017]
- Surveyor dealing with fine, bankruptcy - Muncie Star Press - June 18th, 2017 [June 18th, 2017]
- Mode Media Assets Acquired by Wedding Ad Network BrideClick in Bankruptcy Deal - Variety - June 18th, 2017 [June 18th, 2017]
- San Bernardino officially out of bankruptcy - San Bernardino County Sun - June 20th, 2017 [June 20th, 2017]
- 22 retailers that are at serious risk of bankruptcy - Chron.com - June 20th, 2017 [June 20th, 2017]
- What to expect in defective air bag maker Takata's looming bankruptcy - USA TODAY - June 20th, 2017 [June 20th, 2017]
- Could Illinois file for bankruptcy? - FOX Illinois - June 20th, 2017 [June 20th, 2017]
- Exploding airbags: Takata shares plummet 17% on bankruptcy reports - CNNMoney - June 20th, 2017 [June 20th, 2017]
- These 14 Stores May Be on the Brink of Bankruptcy | NBC Southern ... - NBC Southern California - June 21st, 2017 [June 21st, 2017]
- Medical bankruptcies - WEAR - June 21st, 2017 [June 21st, 2017]
- After five long years, San Bernardino is officially out of bankruptcy. What's next? - Los Angeles Times - June 21st, 2017 [June 21st, 2017]
- Takata to file for bankruptcy Monday, SMFG to provide bridge loan: sources - Reuters - June 22nd, 2017 [June 22nd, 2017]
- Sears Canada files for bankruptcy - CNNMoney - June 22nd, 2017 [June 22nd, 2017]
- Foundation Healthcare Chapter 11 Bankruptcy - Bankrupt Company News (press release) (blog) - June 23rd, 2017 [June 23rd, 2017]
- Implant Sciences Bankruptcy Objections Filed - Bankrupt Company News (press release) (blog) - June 23rd, 2017 [June 23rd, 2017]
- Puerto Rico Bankruptcy: Uncertainty, But Also Stock Profit Opportunity - Seeking Alpha - June 23rd, 2017 [June 23rd, 2017]
- Lakeland day care files for bankruptcy without paying workers - wreg.com - June 23rd, 2017 [June 23rd, 2017]
- Sears Canada Closing 59 Stores as It Seeks Bankruptcy Protection - Fortune - June 23rd, 2017 [June 23rd, 2017]
- Takata to file for bankruptcy Monday, SMBC to provide bridge loan: Sources - CNBC - June 23rd, 2017 [June 23rd, 2017]
- How Sears Canada's Bankruptcy Impacts Sears Holdings Corp. - Seeking Alpha - June 23rd, 2017 [June 23rd, 2017]
- Augusta native sworn in as newest Bankruptcy Court judge - The Augusta Chronicle - June 24th, 2017 [June 24th, 2017]
- Takata reportedly planning to file for bankruptcy - CNBC - June 24th, 2017 [June 24th, 2017]
- Bankruptcy - money_selfhelp - June 24th, 2017 [June 24th, 2017]
- Japan press - Takata expected to file for bankruptcy protection in Tokyo - ForexLive - June 26th, 2017 [June 26th, 2017]
- Bankruptcy guru Edward Altman sees similarities to 2007 in the credit market today - Yahoo Finance - June 26th, 2017 [June 26th, 2017]
- Takata's woes expected to continue beyond bankruptcy filing amid mounting recall costs - CNBC - June 26th, 2017 [June 26th, 2017]