With colder months ahead and a second wave of COVID-19 predicted by some public health officials, the path forward for restaurants doesn’t become any easier.
Edward Webb, an advisory partner at accounting and consulting firm BPM, LLP has a number of clients in the industry who are determining the best exit strategy, which could be selling the business, winding down and closing permanently, or bankruptcy.
Backed by 30 years of experience in consulting and financial management, the accountant says restaurants are “absolutely seeing a sea change.”
“There has been, for years and years, exit planning, right?” Webb says. “And so, business owners are looking ahead years, and they’re thinking about what they may want to accomplish with their businesses and what they want when they leave them … But this is now something different. I used the term exit doing before and that’s exactly what’s going on.”
The harsh reality couldn’t be more relevant for Webb, who recently defended his dissertation at Temple University on ownership transition and development of harvest strategies, or a business plan to maximize value during an exit.
When undergoing this process, Webb notes that his firm begins by ensuring its clients are in the best position possible. That initial phase involves examining payroll and taxes—areas that could haunt an operator down the line—and dealing with landlords, which usually requires independent negotiations. Once that’s done, Webb says his firm can explore the exiting phase, if that step is necessary.
Compared to pre-COVID times, the advisory partner explains that the underlying basics haven’t changed, but the way people are reacting has altered.
“We’ve noticed that certainly the mindset of the marketplace has changed a lot. So there’s a fairly high level of uncertainty out there,” Webb says. “There is this tendency for buyers and sellers to wait on the sideline and see what’s going to happen. Until now, it has been the case that the banks have been pretty soft. I’ve heard people say gentle. The banks have not been aggressive in pursuing ‘past due’ situations and pushing on borrowers, which could really have a big impact on this market.”
“Maybe if there is a systemic change that we’re seeing, it is acceleration of the process,” he continues. “… The economics of this are cranking up in a very negative way. And so, there’s this pressure. We are increasingly seeing folks out there in the market who are feeling urgency. And increasingly, we’re expecting there’s going to be the need for them to take action.”
If the restaurant is facing double-digit reductions in revenue, a decrease in staffing, and no immediate path to recovery, then the operator needs to contact a professional, Webb says. The businesses that are strongest financially are usually the ones that are able to wait the longest and potentially run the greatest risks.
He says it only takes a couple of hours of conversation to help a business owner uncover what their situation is. To further his point, he recalls the wise words of an old boss who said, “Your first loss is always your best loss.” Essentially, it means you want to identify where you currently are and make an assessment of what it means.
“if you don’t feel like you have an immediate path for filling the hole, then you begin to figure out how to get out, because it’s only going to get worse. It’s only going to get more expensive,” Webb says. “And so if your business model has been drenched by coronavirus and you can’t see how it improves, then it’s time to unwind. And that is a conversation that business owners should have. I will tell you that I talked to a lot of business owners along these lines, and there are times when guys reach out to me and we come to the conclusion that no, they should wait it out. And there’s good reasons why, and maybe they should take a couple of steps in certain directions to improve things, but the answer is not to exit. But in many cases it is. What you want to avoid, if at all possible, is the really expensive, risky situation. Nobody wants to go through bankruptcy. It’s painful. It costs a lot. If you can do a nonjudicial wind down and you can negotiate terms with all of your creditors and everybody can walk away and they’re not too seriously damaged by the situation, that may be a win.”
Webb notes this time can be especially difficult for restaurateurs because of their close connection to the business. The skills that served them well in opening the restaurant—the optimism and passion—can get in the way of hard decisions they may need to make.
Because the marketplace is dispassionate. Harvest strategy is not something an operator can place in a drawer for later—it’s something that one takes action on, he says. In his experience, the plan works best when the owners reach a point where they’re fully collaborative. If the business is big enough, it may require a few professionals and possibly lawyers. For the smaller businesses, it’s usually an advisor to direct an operator through the process.
A key step is facing the situation pragmatically and thoughtfully.
“For the business owners, we’re finding that they have to first get beyond the emotional side of it and they have to recognize where they are,” Webb says. “They have to deal with how that feels and face the practical realities that are in front of them. And for most of them, these are not business guys first. They’re restaurateurs. They’re doing that because they love it, and so they probably need to get some professional assistance with this—people who can help them assess the financial side, can make sure that they don’t leave any loose ends that they have negotiated, dealt with their liabilities, and that they don’t leave themselves open for trailing litigation, and things like that. What ends up happening is the creation of a plan, and it’s a plan for execution.”
Regarding what to do with the payout from selling the business, that’s when having a good tax preparer becomes crucial. Webb says his firm can put owners in touch with potential investment opportunities, but that’s not their specific duties.
“From our standpoint, we want to make sure that our clients are as well protected as they can be, and we maximize the circumstance on the exit and then whatever personal advice they need to protect themselves and maximize their personal wealth,” Webb says.