How Will the RRF Force Restaurants to Reassess their Options?

    If there’s one thing we can be sure of, it’s that the market is going to look very different in five years.

    Sandwiches on a counter.
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    Now is the time for you to be looking in your crystal ball.

    In many ways, it feels like the pandemic has been an “equal-opportunity catastrophe.” But we know that‘s not entirely true. Many industries actually fared pretty well, and lots of individuals prospered financially. But the restaurant business, pretty much across the board, got whacked. And although quick-service chain restaurants fared better, most saw a drop in revenue and profit.

    The food service industry lost around 2.5 million jobs and saw sales plunge by approximately $240 billion in 2020. Restaurants that stayed open had new expenses for personal protective equipment, plexiglass barriers and sanitation products. The National Restaurant Association estimates some 90,000 eating and drinking establishments in the United States remain completely closed either permanently or long-term, which reflects the return to operations for many temporarily closed restaurants.

    READ MORE: Restaurant Revitalization Fund Sets Application Deadline

    In the U.S., Congress stepped in to provide immediate relief with the Coronavirus Aid, Relief and Economic Security (CARES) Act, which included the Paycheck Protection Program (PPP). However, there were widespread disparities across many dimensions, including smaller businesses, and many food service businesses were negatively impacted by the restrictions on eligible expenses. The American Rescue Act, signed into law by President Biden in March, sought to address this issue by creating the nearly $29 billion Restaurant Revitalization Fund (RRF) targeted specifically at the food service industry. For those who qualify, this money is a tax-free grant that does not need to be repaid if used according to the program guidelines. Unfortunately, less than two weeks after applications opened, the program had already received requests totaling more than $65 billion and was forced to stop accepting applications. 

    Free money is always excellent. I hope you got some from the RRF. But that is behind us now, unless Washington decides to authorize additional funding. Whether you got money or not, you are going to be impacted by the program: After all, $130 billion just got injected into the restaurant industry, and the uptake of funds occurred in record time. Now, nobody can say with any certainty how people will react post-pandemic. But I’m betting that this summer consumers beat a path en mass to their favorite restaurants for a sit-down meal and some adult beverages. Revenues will increase, and more people will be hired.

    I think it’s also fair to say that the resurgence will have an “equal-opportunity” aspect. Consumers don’t care who got the RRF dollars and who didn’t. But RRF capital will have a powerful impact on those who receive it: Capital can buy time or facilitate change—it buys options. All things being equal, more capital usually translates into improved results. However, one thing capital can’t do is fix a business model showing signs of wear or create operating efficiency out of thin air.

    Restaurant owners need to pay attention. If there’s one thing we can be sure of, it’s that the market is going to look very different in five years. So, I strongly urge you to take a look at these three areas of your business—and be sure that you are comfortable with your answers. 

    1. Cash Flow

    For every business, the starting point is to evaluate your cash flow. Regardless of whether the RRF hits your bank account, you need to forecast your near-term cash needs. The goal of the forecast should be to inform your decision-making and provide visibility into a range of potential outcomes depending on how certain parameters play out. Evaluation of these parameters should include your expectations for revenue as customers return and the impact of potentially increased costs for both supplies and labor.

    In addition, you should consider any additional expenditures such as those necessary to make your customers feel welcome and comfortable as they emerge from their COVID hibernation. It will be critical to remain flexible to adjust the myriad of risks that are likely to arise as the economy reopens, including how quickly people resume prior behaviors, changes in local market infection rates, and possible labor supply shortages. If you’ve made it this far through the pandemic, you have likely already been focused on these efforts and remaining diligent will serve you well.

    2. Profitability

    As we peer a bit further onto the horizon, you will need to assess the business more closely than ever, as the industry has likely changed forever. Monitoring trends against historical information to identify changes in consumer habits and determining whether those shifts are permanent will be more critical than ever for long-term sustainability. You will need to evaluate decisions about staff size, menu offerings, and off-premises sales against a changing landscape which includes new competitors like ghost kitchens and service providers like app-based delivery services who take a hefty cut of your profits. Given that the recovery for the restaurant industry will take time and that consumer behavior in a post-pandemic world is above all uncertain, consideration of potential scenarios and outcomes will be vital to your success.

    3. Business Model

    Finally, you will need to determine whether your existing business model will enable you to compete amidst this changing landscape. Your success will depend on your ability to quickly adapt your business and make the investments necessary to support new ways of operating. Do you still have the drive and passion for this level of customer service and financial performance? In my experience, the answer from entrepreneurs is always “yes.” That confidence is a special gift.

    But the RRF could create other options. Demographics have become a tiresome topic, but Boomers have worked through a few recessions, including the once-in-a-lifetime 2008 financial crisis, and this pandemic may make one want to consider a potential exit from their business. (The new generation of owners, by comparison, are likely to be well-capitalized and aggressive, be they passionate chefs or private equity executives.)

    Currently, the rules for the RRF require a business to be viable to be eligible to receive funds. However, nothing specifies how long a restaurant needs to stay open before it is allowed to shutter. As it currently stands, RRF is a government program with minimal or flexible rules with regard to how the money is spent, which could enable some to wipe the slate clean. For example, an owner could use the RRF to pay off accrued debt and rent (but not make future payments on the principal, interest or rent) and reopen. But, once the federal money is spent, they may find they still need to close down or sell off the business. While this scenario was not a consideration to those who wrote the RRF, owners should consider the potential restructuring or exit strategy options created.

    Time to Look Forward

    To sum up, now is the time for you to be looking in your crystal ball. It’s an opportunity to assess your passion for food service ownership. The lasting impact of the RRF will be enormous, and you may never get a better chance to develop a forward-looking strategy. Good luck!

    Brett Hazlett is a director in the advisory practice at BPM, a West Coast-based accounting and consulting firm that ranks among the 50 largest firms of its kind in the country, where he provides results-driven accounting and finance services to companies at all stages in the business lifecycle. He co-leads the firm’s Economic Recovery and Emergency Task Force, an agile, cross-unit group of senior BPM professionals dedicated to assisting clients with business problems arising from the COVID-19 pandemic and the associated economic fallout. 

    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.