Just for a few minutes, I need you to pay attention. This is not a comfortable topic, and my message isn’t comfortable, either. We all know the story. The world changed in March 2020 as the COVID-19 pandemic reached North America. Quick-service restaurant owners and operators were hit especially hard and were forced to invest thousands of dollars to stay in business to protect their employees and keep customers. Owners employed any means—even third-party delivery services such as Uber Eats, DoorDash and GrubHub. It was not enough.
The stats for last year are terrible. More than 110,000 establishments were either locked down or closed for good by last December, and about 2.5 million restaurant workers had lost their jobs. During 2020 governments made emergency loans and grants available to small businesses. But despite this support—and the first wave of vaccinations—many restaurants are still in deep distress.
Finally, President Biden signed the American Rescue Plan (ARP) into law, which will fund the $28.6 billion Restaurant Revitalization Fund (RRF). The final passage of this important part of the bill comes almost exactly one year after the first restaurants were ordered to close and are largely the result of the efforts of the National Restaurant Association. The association had lobbied Congress persistently, urging the creation of an industry-specific relief program within the larger ARP. The result is hoped to be a win, particularly for the smallest and hardest hit restaurants.
The RRF creates a new federal program for restaurant owners with 20 or fewer locations. Operators can apply for tax-free grants of up to $5 million per location or up to $10 million for multi-location operations. The grant amount is determined by subtracting 2020 sales from 2019 revenues.
That’s the good news, but it probably isn’t the end of boot-strapping and anxious nights for quick-service owner/operators. Financial fundamentals are still critical. Most owners have bled cash over the last year. In the immediate term, the government’s largesse notwithstanding, how many will have enough cash to weather underperformance for months until a return to stable operations? Then, once achieving a stabilized level of operations, can the business make a consistent profit? Accomplishing that, will the current business model support successful operations for 3–5 years?
These questions address the immediate, short-term and long-term concerns that any quick-service restaurant operator faces and must be able to answer fearlessly. Many single store owner/operators have sustained a financial hit that is insurmountable. It is not likely that government funding will be adequate for these hardest-hit businesses. These owner/operators need to take a fully-informed and brutally honest look at their business. For those that believe they have adequate cash, profitable operations and a stable business model, then do not “Pass Go” and proceed directly to developing your successful business.
But for the other owner/operators, you will be facing a difficult time. You do have a few options, but each presents challenges. But first, remember to pay attention to your franchise agreements. Franchisors will seek to protect their brand and any real estate. They likely have a very firm protocol for franchisees in your position. Do not provoke your franchisor. Also, get your accountant and lawyer on board. Paying their fees can be painful, but how much is your peace of mind worth? No kidding, engage the best professionals you can find.
One option is selling the business. A quick-service restaurant owner can use broker services with deep industry expertise. National Franchise Sales from Orange County, California, is one example of many. Or owners can attempt to find a buyer independently. This is not easy, and the market will reflect the number of restaurants currently in distress, which then generates significant price pressures.
Another option is to try to get a private cash infusion. Many struggling owners search high and low for this type of lifeline because they have probably tapped-out all of their friends and family to help finance the original purchase. A gradual recovery is not the restaurant owner’s friend, it will make people risk-averse to putting money into an underperforming restaurant.
If the owner is beyond boot-strapping, the option of simply walking away can be very alluring. For this to happen, a restaurant owner needs to be current on Federal and State taxes and franchise fees. Sometimes, a franchisor will negotiate with the owner to come up with a resolution because they don’t want to lose stores or see real estate lose value. Location is critical, if the restaurant is not in a good location, the franchisor is less likely to help.
The final option is a structured settlement. This is a catch-all term including Bankruptcy, Assignments for the Benefit of Creditors (ABC) or more simple structured agreements that satisfy creditors. Bankruptcy is the most expensive path, but it is the gold standard for resolving financial issues. Debtors either successfully operate the business within the bankruptcy, or the assets are sold, but either way, the process usually results in a discharge, meaning the detor is no longer responsible for the debt.
Remember, don’t play with taxes. Employment taxes are the personal responsibility of the owner. Unpaid employment taxes can become a personal problem quickly. Reconciling sales tax generally has a longer fuse, but the owner remains responsible for paying any balance owed.
The big problem with most individual owners is their mindset. Entrepreneurs believe in their ability to make things work. This allows them to survive and thrive - in a typical business environment. But we are not living in a typical business environment. The impact that our current environment is having on smaller QSR businesses cannot be controlled. But you don’t have to hit rock bottom. Assess your business aggressively and thoroughly. Take decisive action, which could mean taking the government stimulus and managing your successful business. If another option is appropriate, don’t let entrepreneurial pride get in the way. Help is out there.
Edward Webb, DBA is a Partner at BPM LLP, one of the 50 largest public accounting and advisory firms in the U.S. Edward has over 35 years of experience in consulting and financial management, including specific experience in business restructuring and leadership advisory services. He currently leads the Corporate Finance Consulting group at BPM and is also on the adjunct faculty at San Jose State University.