The Side Dish

Finance to Table Education for Operating Your Restaurant

So you’re thinking of filing for bankruptcy? Five tips from a corporate attorney to consider before filing.

Guest Blogger Jeremy R. Jarrett is an associate lawyer with Jennings Strouss & Salmon, P.L.C. He assists a wide range of clients with mergers and acquisitions, capital raises, corporate governance, commercial contracts, reorganizations, and restructurings.

Currently, the United States is in the midst of an unexpected pandemic that is wreaking havoc on all businesses, especially restaurants. In an effort to lower the cases and deaths of COVID-19, state laws forced restaurants to shut down temporarily, which changed consumer habits. Many restaurants have seen sharp drop offs in both revenues and customers. There has been an upsurge in bankruptcies and permanent closures nationwide. Before a restaurant owner makes such a decision, however, they should at least consider whether taking the following steps may enable the business to survive these (or other) uncertain times.

Don’t miss: Cost segregation benefits for restaurant owners

The Squeaky Wheel Gets the Grease.  When it comes to asking for forbearance from lenders, rent abatement from landlords, or contract concessions from vendors or other third parties, the colloquial phrase above really does capture the picture. Lenders, landlords, and suppliers are likely to be inundated with requests for relief, persistent communication and requests can be vital in allowing a business to survive. Struggling restaurants should approach each of these fronts (asking for workouts with lenders, landlords, and vendors). We have assisted clients in many situations in which the first several communications go unanswered, but ultimately, when we are persistent, we are able to assist in working out relief for clients.

Have a Proposed Plan.  When asking for forbearance from a lender, rent abatement from a landlord, or a contract concession from a vendor, it is beneficial to have a concrete proposal in mind to transmit. The proposal may not (and is likely not to be) the final business deal made between the parties. Requests for relief, however, will likely be better met if a written plan is proposed rather than a generic request for relief. For example, a tenant’s request for a six-month thirty percent rent reduction, with a catchup later, will likely be met with a better response than “I don’t want to pay rent.” Often it has taken perhaps five or six forbearance requests before finally nailing down agreeable terms. Persistence is key.

Understand Your Business and Prioritize.  In turbulent times, restaurant owners need to understand “what keeps the lights on” and this involves making tough decisions. When there isn’t enough money to pay everybody, restaurant owners need to understand exactly which parties are necessary to their survival first, rather than just throwing in the towel. For example, would a reduction in force give the restaurant the breathing room it needs? Are there some vendors not vital to the production of revenue? And likewise, if there are vendors or suppliers crucial to the ongoing operations of the restaurant, it is important for the restaurant to do whatever it can to keep those suppliers happy. Just because a restaurant cannot pay every bill during a turbulent time, does not require a bankruptcy filing. Vendors, like lenders and landlords may be willing to negotiate on payment terms notwithstanding contractual provisions to the contrary.

Recognize Counterparties may have Limited Ability to Help.  In the same way your restaurant is requesting assistance from its counterparties, restaurant owners should understand that they do not have unlimited ability to make changes to current agreements. For example, a landlord who has a mortgage lender may not be able to make changes to rents beyond a certain amount without violating its loan agreement or defaulting on its own obligations or needing lender consent. This connects back to point #1 above, early communication and related follow up can flush these issues out and help all parties come to an agreement on a plan that allows for everyone to survive.

Consider Alternate Ways of Financing Your Business.  Traditional lenders are not the only way to raise capital for your company. If your bank will not provide the necessary financing for your restaurant, consider whether other means might provide needed capital. As noted above, vendors may be willing to stretch payment terms. Non-traditional lenders, like factoring companies or other commercial lenders may fund your restaurant. And you can seek to raise equity capital or debt that may convert into equity, or perhaps even raise non-equity capital through portals like Kickstarter or Go Fund Me if no securities are offered in exchange. Counsel can assist in helping to navigate through the legal requirements for conducting these kinds of transactions.

The five points above are meant as guideposts and actions to think about before considering bankruptcy. There will be business circumstances where even the most diligent restaurant owner is still left with no other options, and that is what the bankruptcy laws exist for. However, prior to throwing in the towel, or asking for legal protection, the steps above should be considered for all restaurant owners.

Jennings, Strouss & Salmon, P.L.C. attorneys are available to assist businesses of any size with legal needs during these turbulent times. If you have questions about this, please contact Jeremy R. Jarrett at jjarett@jsslaw.com.

Contact your Henry+Horne tax professional for any of your tax and accounting needs.

Get in on the conversation.

Unfortunately, we cannot give free advice to non-clients by email, comment response, or phone call. Thank you! Read our disclaimer.