The restaurant industry was booming. Coming into 2020 the industry as a whole was entering it’s eleventh consecutive year of growth, as restaurant.org stated in it’s annual report in February. The industry had been consistently expanding and providing jobs and opportunities for more and more people every year — until Covid-19 struck our country.
In just a few months things have drastically changed for the worse. As stay-at-home orders swept through the nation early March, restaurants were forced to shift into the delivery and takeout business, or shut their doors entirely. Now that this crisis has dragged on for several months many are beginning to fear that a majority of the restaurants that closed may never reopen.
Whether you anticipate a slow economic recovery or quick turnaround, one thing is for sure: the restaurant industry will never be the same. In this article we will discuss the state of the industry and the options available to restaurant and bar owners that are facing the closure of their business. The situation is dire, but there are some silver linings. Read on to find out more about how to keep your business up and running through this difficult time.
State of the Industry
The negative impact of Covid-19 on the restaurant industry has been both severe and widespread. The James Beard Foundation conducted a survey of restaurant owners shortly after the crisis began in March, and the results were troubling. More than 60% of those taking the survey did not have enough operating capital to close for a single month. Even worse, almost 75% of restaurants that were forced to close by new regulations relating to Covid-19 do not believe that they will be able to reopen after two months.
Since this survey more than two months have passed. While most states have begun the process of reopening in one form or another, the general consensus amongst those in the restaurant industry is that even after the nation fully reopens, they will be required to operate in a different and more expensive manner than before the pandemic. As USA Today reports, federal and state regulations are requiring restaurants that reopen to operate at less than full capacity, provide PPE to their employees, and perform additional sanitization procedures throughout operation.
These new measures come at a significant cost. Even if a restaurant was permitted to reopen, able to rehire their staff and employ the new sanitation measures, prominent restaurateurs like Danny Meyer, the founder of Shake Shack, believe that restaurants cannot operate profitably at 50% capacity. In an interview with Bloomberg, Meyer stated that the only way he could foresee reopening his full-service restaurants would be with a widely available vaccine.
The impact of the virus has been especially harsh on the small business owners running “indie” restaurants throughout the nation. Unlike their franchise and chain restaurant counterparts, these restaurants do not have the bargaining power to negotiate delivery fees with third party vendors like Grubhub and Doordash, who have taken on a significant role in keeping restaurants alive in the past few months.
Furthermore, as Forbes reports, while the pandemic continues to drag on questions about the viability of the supply chain have begun to arise. Most vendors of perishable foods rely on a predictable future demand of their products to accurately plan for the growth of livestock and produce. The uncertainty caused by the virus will lead to shortages in this supply chain as vendors try to cushion the blow to demand by reducing their output. When the shortages hit, once again it will be the large chain operations that will hold the bargaining power to get the supplies they need, leaving the indie restaurants to fight for whatever is left.
The industry as a whole is suffering. The impact to small business owners has been particularly severe. Fortunately, there are some options available that may help a restaurant owner navigate through this crisis and come out on the other side operating profitably. One option is to consider filing for Chapter 11 bankruptcy. However, while filing for bankruptcy may provide all of the answers for some, it is not the only option available.
3 Options Restaurants and Bars Should Consider Before Filing For Bankruptcy
Chapter 11 Bankruptcy and the new provisions enacted in both the Small Business Reorganization Act of 2019 and the CARES Act introduced this year provides some excellent options for restaurant owners that are struggling to survive this crisis, but they are not the only options available. We will discuss bankruptcy and its benefits in further detail below, but first let’s take a look at some other ways to increase cash flow and keep your business operating through the pandemic.
- Insurance Payout – Most restaurants have attained business insurance to protect against unforeseen threats to their operation. In many cases this insurance will include a “virus rider,” which is an addition to the policy that covers forced shutdown due to something like an employee contracting Hepatitis and forcing the business to close and sanitize. As Feast Magazine reports, there is an ongoing battle between restaurant owners claiming this rider should cover shutdown due to Covid-19, and insurance companies claiming that the crisis falls outside the scope of the policy. If you’re unsure whether your insurance policy contains this rider or some other provision that may be useful during the shutdown, contact an experienced attorney who will be able to review your policy and advise on the options available to you.
- Negotiate with your Landlord – Landlords are business owners too. They need their properties to remain occupied and thriving in order to turn a consistent profit. Restaurant focused website Eater.com explains that in many cases a landlord will be willing to work with a restaurant owner to reduce their rent in the short term so that they will be able to survive this down period and get back to business (and paying rent) once things return to normal. Once again, an experienced attorney will be of great help in reviewing lease agreements and conducting negotiations with one’s landlord.
- Government Assistance and Loans – The federal government introduced the Paycheck Protection Program or “PPP” as part of the CARES Act, a broad piece of legislation designed to help businesses and individuals survive the Covid-19 pandemic. In theory, these PPP loans sound great, as they are completely forgivable when used for specific purposes, like employee paychecks and health benefits.
Unfortunately, the introduction of the PPP into the economy did not go as planned. The loans are notoriously difficult for small restaurant owners to obtain, and soon after the introduction of the program news sites like CNN were reporting about large, well-funded chain restaurants like Shake Shack and Ruth’s Chris Steakhouse receiving millions of dollars in PPP loans. While some (but not all) of these organizations returned the money, it once again demonstrates the differences in power and capability between large and small businesses struggling to navigate the crisis.
Even those lucky enough to get the PPP loan are still stuck worrying about whether they are using the funds in accordance with the regulations so that the loan will ultimately be deemed forgivable by the government. The PPP, its rollout and subsequent updates have mostly proven useless for the restaurant industry, as Claire Reichenbach, CEO of the James Beard Foundation stated to industry magazine FSR, “The fact that restaurant owners are now more fearful of losing their livelihood than before the PPP opened, shows just how futile the program has been.”
If you’re a restaurant owner who did not receive funds from the PPP, does not have an applicable insurance policy and cannot negotiate with their landlord, your best option moving forward will be to consider filing for Chapter 11 Bankruptcy.
What Happens When A Restaurant or Bar Files For Bankruptcy?
Chapter 11 of the Federal Bankruptcy Code provides business owners struggling to repay debt with a way to repay these debts over the course of several years, and potentially discharge (or not pay) certain debts entirely. One of the primary benefits of filing for Chapter 11 bankruptcy is the automatic stay, which as the name suggests automatically goes into place once the bankruptcy is filed.
The automatic stay is a stay on all actions by creditors to collect debt, garnish wages, sue and foreclose on property throughout the bankruptcy proceeding. So if you are a restaurant owner who is at risk of immediately losing your business due to collection actions, filing for bankruptcy will give you some breathing room to review your options and develop a plan to get out of debt and keep the business running.
Qualifying for Chapter 11 requires the filer to meet certain eligibility requirements, including the payment of filing fees, attending a credit counseling program and creating a disclosure statement that details the business’s financials. Once the bankruptcy proceeding has begun, the business owner will need to develop a plan to repay their debts over the course of the next several years.
Debts need to be paid in order of priority, with secured creditors receiving the highest priority and equity holders the lowest. The plan will need to be approved by the court and payments will need to be made in full and on time to avoid dismissal of the proceeding.
Once the repayment period is complete the bankruptcy proceeding will come to a close and any remaining eligible debts will be discharged. At this point, having caught up on all of their debts, the business owner can return to normal operation of their restaurant.
What Are The Advantages Of Filing For Bankruptcy?
Filing for Chapter 11 bankruptcy carries with it several advantages and a few important disadvantages when compared to the alternatives discussed above. Obvious advantages include the halting of collection attempts through the automatic stay and the ability to repay debts over the course of several years as opposed to immediately.
In addition, certain debts may be discharged without having been paid in full, and some business owners may use Chapter 11 as a way to exit the restaurant industry by selling their business at a higher value due to the reduction in debt.
What Are The Disadvantages Of Filing For Bankruptcy?
On the other side, it’s important to recognize that filing for Chapter 11 can have some disadvantages. Once a business has filed for Chapter 11, they will not be able to file again right away should they fall into debt again, so the timing to file is something that should be carefully considered. Furthermore, going through a Chapter 11 proceeding means that certain areas of one’s business will be subject to oversight and approval by the court and the business’s creditors, through the creditors committee.
The creditors committee can object to a debtor’s repayment plan and after an initial period of exclusivity they are able to propose their own plan which usually is not very favorable to the debtor. They can also object to certain business decisions if they believe it will impact the debtor’s ability to make timely payments in accordance with the plan. This oversight can become cumbersome, especially in the case of a small business whose operation can usually be best run by the business owner who, especially within the restaurant industry, has the knowledge and experience to effectively run the business.
Filing Bankruptcy As A Small Business
Fortunately, the federal government recognizes that some aspects of a standard Chapter 11 filing are not well suited to small businesses. As such, the government has enacted a special section of the bankruptcy code for small business debtors looking to file under Chapter 11. Filing as a small business has many advantages including no creditors committee, no required disclosure statement and the exclusive ability to create the repayment plan.
While filing as a small business under the new code presents restaurant owners with a streamlined process designed to make the proceeding move quickly and efficiently, until recently there was a significant barrier to filing under this provision: the debt cap.
When the Small Business Reorganization Act of 2019 (“SBRA”) introduced this new provision of Chapter 11 bankruptcy, it set a limit on the amount of total debt a business could have in order to be eligible to file under this provision. This maximum total debt was set to $2,725,625, a number which many restaurant owners agree falls well short of the debt they have incurred before and during the Covid-19 crisis.
This amount was increased significantly through a section of the recently introduced CARES Act, which congress set forth as a response to the economic turmoil caused by the pandemic. As ABF Journal reports, the CARES Act increased the debt limit from $2,725,625 up to $7,500,000, opening the door to many more struggling small businesses seeking options to relieve their debt.
This increased debt limit along with the streamlined process of filing under the SBRA present a unique opportunity for many business owners struggling to deal with the fallout from Covid-19 to get a handle on their debts and remain in operation. If you’re unsure whether you would be eligible to file for Chapter 11 as a small business, an experienced attorney will be able to discuss the specifics of your circumstances and advise on your options regarding bankruptcy.
The government shutdowns and the economic turmoil resulting from the Covid-19 pandemic have decimated the recently thriving restaurant industry. It remains to be seen whether the industry as a whole will ever recover to the levels reached prior to this crisis, and it’s likely that a large percentage of restaurants forced to close down will never reopen again. For those restaurant and bar owners struggling to deal with new and old debts incurred or worsened by the crisis, there are a few options available and worth considering.
Everyone’s situation is different, and whether you are interested in conducting a negotiation with your landlord, looking into your insurance policy or filing for Chapter 11 bankruptcy, an experienced bankruptcy attorney can help advise on you on the best options available considering your specific financial circumstances at this time. At Rosenblum Law our attorneys are ready to help, call us today.