Bars, restaurants, and brewpubs – from chains to stand-alone locations — were already facing significant headwinds in 2019 due to higher payroll costs (including due to minimum wage increases), increasing consumer preference for take-out, and other factors. This resulted in numerous bankruptcies, including from well-known chains such as Houlihan’s, Perkins, Granite City Food & Brewery, Kona Grill, and numerous others.
The impact of COVID-19 on an already challenged industry has been devastating and promises to get worse. Numerous states and municipalities have ordered breweries, distilleries, bars and restaurants to temporarily close (often excepting take-out and delivery services), and even where locations remain open, consumers are largely staying at home at the direction of authorities (social distancing and quarantining). With COVID-19 cases still multiplying quickly in the United States, these issues are unfortunately likely to worsen before they improve.
For many chains, franchisees, and stand-alone locations, the impact of the above events on cash-flow will be devastating, often making it difficult or impossible to service existing debt (e.g., bank loans and lines of credit), pay rent, pay franchise fees (where applicable), and generally meet ordinary course obligations. Even businesses with strong balance sheets should be prudently planning for the worst.
If there is even a possibility that the foregoing issues may ultimately result in acute financial distress (e.g., the need for new equity or debt, defaults under existing agreements, etc.), the importance of pro-actively learning about your options for bankruptcy, and restructuring – and doing so quickly – cannot be overstated: it is often the difference between survival and liquidation. Not only can businesses avoid common pitfalls, business owners and stakeholders can ensure that they exercise their fiduciary duties, and in many cases can “take advantage of a bad situation” – i.e., there are often opportunities that can flow from distress situations if they are handled strategically:
- Avoid “band-aid” solutions. If additional equity or debt is needed, it may make far more sense to recapitalize the business as part of a larger restructuring that eliminates and/or defers other debt obligations – increasing the “runway” provided by the new funding and potentially resulting in a cleaner balance sheet;
- Be cautious about forbearance agreements and amendments. If existing creditors, including banks, are demanding forbearance agreements or more onerous terms for deferring obligations or providing additional credit, it is critical to consider the ramifications of those terms, and push back where appropriate (not doing so can put the business, and potentially guarantors, at significantly heightened risk);
- Consider strategic alternatives. As noted above, sometimes businesses can take advantage of bad situations, including through an operating (Chapter 11) bankruptcy, to clean up their balance sheets, shed or re-negotiate burdensome leases and contracts, and otherwise optimize finances and operations to take advantage of the next up-cycle. Bankruptcy can also provide a “breathing spell” from creditor claims that frees up cash and can allow a company to “weather” a storm that might otherwise be insurmountable.
Don’t hesitate to talk to counsel in these times as creative and dynamic solutions may be necessary in the coming months.