Restaurant Rescue Action Items for COVID-19

If in a franchised system, operators should reach out to their franchisors to discuss royalty and advertising fee abatement options, as well as rescheduling capital expenditure requirements.

Faced with the prospect of $225 billion in lost sales over the next three months and the loss of up to seven million jobs, according to the National Restaurant Association, the restaurant industry has never faced the daunting, pervasive, and potentially catastrophic challenges that the COVID-19 pandemic presents. The pandemic has left restaurant chains and operators searching for solutions to address novel issues and stem an impending financial disaster. While every situation presents a unique set of challenges to resolve, there are certain levers that restaurants should consider addressing immediately in an attempt to save the business. These actions items are discussed below.

Optimize Available Sales Channels. With full-service concepts experiencing same-store sales declines in excess of 50 percent, the primary focus has to be on finding ways to drive revenue from remaining sales channels. As the nation continues its march toward the closure of all dine-in service, focus has shifted to drive-thru, takeout and delivery. To maximize cash flow, staff these efforts accordingly and look to boost convenience and value to the consumer. Building repeatability in this environment is essential. Finally, if not already in effect in your area, lobby appropriate governmental authorities to permit alcohol deliveries by restaurants with valid liquor licenses.

Forecast Cash Flow. Prepare a weekly cash flow forecast for the next three-month period. The process of creating this granular forecast will help in evaluating the necessity of every cost within the operation and identifying expenditures that can be reduced or eliminated. Evaluate weekly variance reports and be prepared to make the changes necessary to preserve liquidity.

Allocate Scarce Resources. With the cash flow forecast in hand, evaluate every expense to trim as many costs as possible. As evidenced by recent development, this analysis could likely result in furloughing employees. It may also lead to the temporary or permanent closing of certain locations. Consult with legal counsel regarding the federal Worker Adjustment and Retraining Notification (WARN) Act, as well as state versions of the WARN Act, which may require advance notice prior to closings and mass layoffs but which may also spell out potentially applicable exceptions, including those involving “unforeseeable business circumstances.”

Evaluate Liquidity Options. Review your loan documents to understand remaining loan availability and the conditions that must be satisfied in order to borrow. These conditions typically include no existing defaults and a reaffirmation of all representations and warranties. Such representations are likely to include certifying that no “material adverse effect” has occurred, which is a highly fact-specific determination. Assess the likelihood of satisfying upcoming financial covenant tests in light of deteriorating financial performance, including a review of adjustments to earnings before interest, taxes, depreciation and amortization (EBITDA) and consolidated net income (CNI) included in the loan documentation that may be appropriate under the circumstances (including those related to extraordinary losses/nonrecurring expenses). Also determine whether ownership has the ability to provide a liquidity bridge (either in the form of an equity infusion or a loan). Finally, review and discuss credit terms with your suppliers and consider proposing payment holidays.

Review Leases and Other Contracts. Review leases and other material contracts, paying particular attention to the existence and specific language of any force majeure clauses, which may excuse or delay payment or other obligations upon the occurrence of certain events. Force majeure (meaning “superior force”) clauses are often viewed as boilerplate but can excuse or delay a party’s performance under a contract as a result of circumstances beyond the party’s control, like natural disasters or other “acts of God.” The analysis is highly dependent upon (a) the specific contract drafting, including whether the language covers pandemics, government actions or other language potentially sufficient to capture the current COVID-19 outbreak, and (b) the choice of governing law set forth in the contract.

Assess Business Interruption Insurance Coverage. Although pandemics are often expressly excluded from coverage and generally do not trigger coverage without a direct physical loss to the insured property, business interruption insurance policies should be reviewed to determine whether any losses resulting from the pandemic may be covered by insurance. This issue, like many others, likely will result in litigation, with at least one lawsuit already being filed in Louisiana seeking a declaratory judgment on the scope of civil authority coverage related to COVID-19. Additionally, given the unprecedented scope of this crisis, contemplation of legislation at the state or federal levels regarding business interruption coverage has already begun and may impact your insurance analysis.

Communicate with Lenders. By this point, we expect that most restaurant lenders have engaged with their borrowers to discuss the condition of the borrower’s business. If this has not occurred, borrowers should reach out to their lenders preemptively. In our experience, unprompted and candid communication with lenders is critical and beneficial, particularly when an accommodation regarding payments and/or covenants is likely to be requested in the future.

Contact Your Franchisor. If in a franchised system, operators should reach out to their franchisors to discuss royalty and advertising fee abatement options, as well as rescheduling capital expenditure requirements. Several franchisors have made announcements regarding royalty discounts and/or extensions, advertising fee adjustments, rent deferrals, capital expenditure and new unit development postponements or other relief. We expect more franchisors to make formal announcements regarding franchisee obligation relief in the coming days.

Research Government Assistance Programs. Restaurants should research available governmental assistance programs, including (if a small business) the SBA disaster relief program, and monitor new developments. The National Restaurant Association has requested, among other relief: (a) a $145 billion fund to compensate for reduced revenue to cover payroll and other operational expenses; (b) $35 billion for a disaster relief grant program; (c) mortgage, lease and loan obligation deferrals; (d) $100 billion for federally backed business interruption insurance; (e) expansion/creation of various loan programs; and (f) various tax relief. Finally, continue to monitor sales tax deferral programs for eating and drinking establishments that have been announced by a handful of states, including New York and Illinois. These initiates allow qualified businesses to defer upcoming sales tax payments without incurring penalties or interest.

While chains and operators have been forced to take immediate action, the above items should serve as a checklist to ensure that restaurants are doing everything possible to survive these challenging times.