4 Key Legal, Operational Insights for ‘Survival Mode’
Now, about a month into the COVID-19 crisis in the U.S., things might be starting to feel somewhat normal. The remaining sales are fairly steady, there’s less grocery hoarding and delivery usage continues to rise as people get bored of their cooking.
But as society begins to find a sense of normalcy, things are still extremely difficult in the restaurant industry. And as a panel of franchise experts discussed in a Franchise Times webinar titled “Surviving the COVID-19 Crisis,” the franchise industry is now in survival mode.
The panel moderated by Franchise Times Editor Laura Michaels touched base with BDO managing director Mark Houston; BDO restructuring and turnaround partner David Berliner and Lathrop GPM partner Ryan Palmer.
The group dug into a lot of key information about the CARES Act, operational tweaks and the gravity of the situation. To see the full webinar, head to the Franchise Times webinar page. But four key things emerged as survival best practices.
1. Push Boundaries Together
While every business still has a whole host of contracts and obligations on paper, there are a lot of boundaries being pushed to make things work during this strange time. As Ryan Palmer said, "We’re seeing a good spirit of cooperation here and a lot of creativity, a lot of people aren’t looking at their contract. At some point that will have to end, and we’ll be back in a world where the contract will be looked at. Look at the agreement and see what you can do and what you can provide. And if it's not covered, talk to your franchisor.”
He said it’s the same with other vendors, including landlords. They want tenants to succeed (and be able to pay rent) so some rules are going out the window.
“Check out restrictions in your lease, we’re seeing a lot of things like setting up a tent in the parking lot so I can have a drive-thru. That’s not in the lease, but again we’re seeing landlords allow that,” said Palmer. “There are so many things you should be looking at right now, but every franchisee needs to talk to their vendors.”
2. Right-size costs and projections
Sales are down across the board and operators are struggling to prioritize what exactly to do. But the most impactful thing operators can do right now with a clearer picture of what COVID-19 has done is look through the P&L, combing over every cost and line item.
“Examine everything individually,” said Mark Houston. “Franchises need to create revenue forecasts right now based on the sales recorded in the last two weeks.”
Then, look at every cost draining cash reserves.
“I think franchisees should look at managing all their costs. Franchisees really need to be prioritizing their payments. cash is a valuable recourse in this environment and they should look at what invoices get paid and when,” said Houston.
He said operators need to focus only on the business critical vendors. TV service for dining rooms, for example, that’s not necessary for sales with dining rooms closed.
“Costs of goods is one thing franchisees should discuss with franchisors. Only vendors that impact the operation of the company should be paid right now,” said Houston, and don’t pay early, even if that was the norm pre COVID-19. “Now is the time to re-read each contact and terms of service and make sure you’re not paying any vendor early."
Looking at insurance costs is key, too. Without a dining room, with fewer employees and few, if any, customers in the actual dining room, it’s an expense that can likely be slimmed for the duration of business disruption.
3. Right size the workforce
No business owner wants to lay off staff or furlough employees, especially after years of brutal labor competition. But it’s a cruel reality when sales are down this much across restaurants and retail.
“Reduce hours and reduce labor hours, manager salaries could be reduced. Numerous companies are reporting salary reductions of 25 to 30 percent,” said Houston.
Palmer said now that things are settled, it might be easier to make the tough decision with current sales levels in mind.
“First you need to determine what your reduction needs are and if it’s furloughing or laying off,” said Palmer. “Most people are in that plan or in the middle of that plan as they had to take action 10 days ago.”
The non-franchised casual dining giant Cheesecake Factory furloughed 41,000 workers, with the hope of bringing them back once everything starts up again.
“The idea is that by furloughing instead of laying off they could speed up the ramp up at the end of this instead of rehiring,” said Berliner.
Under the CARES Act, furloughed employees get at least $600 a week. That’s a big change meant to keep people from becoming fully unemployed. But the rules around termination, furlough and laying off is a state-by-state issue.
4. Beware of details
While there is a loose, community spirit right now, there are still key things to think about. For instance, when furloughing employees, operators need to be very aware of state rules around that, what sort of compensation furloughed employees are entitled to. Employment laws are not something with which to play fast and loose.
“One nuance to consider, every state has their own WARN laws [Worker Adjustment and Retraining Notification], so check what those laws are and what it covers in an unexpected event,” said Palmer. “That includes paid time off obligations, offsetting patrol tax deductions, etcetera. It should be a net zero, but it’s complicated, so talk to your attorneys and advisers for that.”
Another area to watch is lending covenants.
“Franchisees should be in contact and ask for forgiveness in their covenants. All franchisees should reach out to their lenders,” said Houston.
Fine print that otherwise would be ignored in a normal era may be critical issues if ignored.
“One thing that’s really been catching people off guard is this no-other-debt clause in a lot of loan documents. You need approval and that will require other debt like you could seek in CARES,” said Palmer. “If that loan will be forgiven, that will likely get consent. But if you’re not likely to meet the forgiveness levels that may be a tough discussion.”
Ignoring something like that could empower a bank to call in the entire loan, which would make a hard time into a potentially business-ending oversight.
For more insight from the group, check out the full webinar. And for insights like this and other key operational wisdom, don’t miss the Franchise Times Restaurant Recovery Week. This series of webinars from vendors, consultants, operators and other franchise stakeholders wil dig into every facet of the restaurant business to outline a path to recovery. Register today for the weeklong event held April 20-24.