When restaurateurs are facing financial distress, filing for bankruptcy may be considered as part of a plan to either sell or restructure a business.
It’s not, however, always a necessary course of action for entrepreneurs. During a panel at the Restaurant Finance & Development Conference earlier in November, industry advisers said bankruptcy can be avoided if a plan of action is made with lenders when trouble first starts.
MorrisAnderson CEO Dan Dooley said restaurant owners usually have three options when facing hardship. The first is an effort to turn the business around, the second is recapitalizing, refinancing or restructuring it, and the third is selling the business.
Amy Forrestal, managing director at Brookwood Associates, said in her experience, bankruptcy can be avoided in the latter two options, and it leads to better outcomes.
“Sometimes the owners are looking for a solution or they’re tired and want to get out,” Forrestal said. “But getting out or restructuring doesn’t necessarily mean it needs to be in bankruptcy at all. We’ve done a lot of our work outside of bankruptcy, and often times, that’s a good way to do it.
“When you go into bankruptcy, you lose control,” said Forrestal. “Plus, there are a lot of expenses beyond bankruptcy. The other factor is time. If you start getting into a tight situation, my suggestion is to start talking to people early, because then you’ll have time to potentially do something outside of bankruptcy.”
On that point, Luis Lluberas, a member of Moore & Van Allen’s financial restructuring team, said timing and cash on hand are tied together.
“You have to ask, ‘how much liquidity do I have?’” Lluberas said. “If you don’t have your own liquidity, you have to ask somebody for it, and the natural spots in the franchise space are incumbent lenders who have equity in your franchise stores.”
Because of the time crunch, Lluberas said it’s critical to be fast when staging a plan of action for the business, adding, “You should be Usain Bolt when pulling levers. Don’t wait.”
Forrestal agreed, and said, “if you know things are going in the wrong direction, the sooner you communicate with your lenders and explain to them what you’re doing to try to negate the issues, the more receptive they’ll be.”
There are scenarios, though, where the bankruptcy play becomes the better option, and it’s when an owner is facing distress at multiple units. In these cases, Forrestal said facilitating a process through bankruptcy is sometimes necessary when mediating with the franchisor.
“Many of them are public and they have to disclose on a quarterly basis information about their closures,” Forrestal said. “Many of them also have securitized their royalties. If you want to close a big swath of stores, it causes a problem for their financing. So, usually, they try to moderate and control those closures.
“If you need to close a lot of stores, it’s probably going to get pretty contentious,” said Forrestal. “You will likely have to go into bankruptcy, because it might not be as cooperative of a process if you go directly to the franchisor.”
Lluberas said to avoid getting to that stage, the solution is going back to having good communication with all involved lenders at an early point.
“Collaboration needs to be part of the answer,” Lluberas said. “When you get into distress, don’t be surprised if the first question is, ‘what’s the other lender taking a hit on?’ or ‘are you putting in equity?’ Then you get into situations where people are willing to help, but they want to understand they’re not the only one’s helping and other levers are being pulled. So, tell them what other people are doing to help out.”