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Advice for Restaurant Business Owners
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Company debt advice for restaurants
How can you protect your hospitality business from rising costs due to Covid-19, Brexit, and sector challenges? Understand formal insolvency procedures to help save or close your restaurant, such as a Company Voluntary Arrangement (CVA), Company Administration or Creditors’ Voluntary Liquidation (CVL).
As a sector arguably hit hardest by the Covid-19 pandemic, the road to recovery is proving to be a long and arduous one for many in the hospitality industry. Long periods of enforced closure hammered cash flow and depleted cash reserves, while the current economic uncertainty is squeezing discretionary spending and prolonging the process of replenishing those funds which were lost.
This has the potential to push many restaurants to breaking point. If you believe your restaurant is heading towards a position of insolvency - or perhaps you already know the business to be insolvent - taking expert advice should be a priority. Not only will professional insolvency advice give your restaurant the very best chance possible of effecting a successful turnaround, it will also help to protect your personal position should the company be unable to continue trading.
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If you are concerned as to what the future holds for your restaurant, taking expert advice ahead of time can put you in the best position possible, allowing you to make an informed decision as to your next steps.
This may include a rescue and recovery plan which may allow you to continue trading while restructuring your restaurant’s finances, or alternatively a formal closure process known as a Creditors’ Voluntary Liquidation – or CVL, if the current situation has taken the restaurant beyond the point of rescue and it has become insolvent.
Whether your restaurant can be saved, or whether it needs to close its doors for good, depends on a host of factors including its financial health prior to the pandemic, the local restrictions it has been under or is likely to fall under, as well as its ability to successfully and profitably shift operations to a delivery or collection service.
A licensed insolvency practitioner will be able to talk you through your options, and if it is decided that your restaurant needs to enter liquidation, they will explain what this means for your business, your creditors, and your staff.
A CVL is a formal insolvency process which means it can only be entered into with a licensed insolvency practitioner. They will be responsible for identifying all company assets, distributing proceeds to your company’s outstanding creditors, before ensuring your restaurant is wound down in an orderly manner.
Once your restaurant has been liquidated by way of a CVL, any remaining company debt will be written off, and unless you have provided a personal guarantee for this borrowing, you will not be expected to make up the shortfall.
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When COVID-19 forced Mark’s restaurant to close, business ground to a complete standstill.
Operating from a large and prominent high street location, the restaurant’s main source of income was from large group bookings such as birthdays, family celebrations, office functions, and wedding receptions. Although the restaurant did begin to offer delivery services at the start of the lockdown period, it quickly became apparent that their business model of catering for events and gatherings did not translate well to couples ordering in food at home. Profits were down, yet costs were continuing to accrue; the restaurant made the decision to temporarily close down and cease their delivery arm.
All staff were furloughed as part of the Coronavirus Job Retention Scheme, yet the company still had overheads to pay such as rent, insurance, and utility bills. They had also suffered thousands of pounds in spoiled stock which had been ordered prior to the lockdown measures being announced.
The restaurant reopened as soon as restrictions were lifted in July, and while loyal customers did return, lucrative group bookings were still down.
After arranging a meeting with one of our licensed insolvency practitioners, it was agreed that the restaurant was viable in the long-term, however, the current restrictions on group bookings and social distancing was going to impact cash flow in the short-term.
Following an exploration of a variety of options, a CVA proposal was drawn up and presented to creditors which was subsequently accepted. The restaurant can continue to trade and its monthly outgoings have now been reduced to a level which can be sustained with less covers and fewer group bookings.
Although selling your restaurant may seem like the ideal way of ridding yourself of your company and the current challenges it is facing, while giving your employees the chance to retain their roles, putting this into practice can be tricky. If you are looking to sell your restaurant, you need to know what your potential buyers are looking for and how best to market your restaurant to these investors.
The simple fact is that not all restaurants will be able to be sold, particularly in the current climate; however, there are still buyers out there looking for good opportunities to purchase existing hospitality businesses.
Whether your restaurant can be sold will depend on a number of factors including its assets, its current and past financial performance, as well as its reputation and existing customer base. Even if your company is current struggling financially, there may be someone who sees it as an attractive prospect and is keen to turn around its fortunes.
Selling a restaurant can be a difficult and lengthy process, however, employing the services of a corporate finance expert can not only greatly increase the chance of you securing a successful sale, but can also ensure you negotiate the best price possible.
Our first step will be to ascertain whether selling your restaurant is a possibility, and if it is, our team of corporate finance experts can help you through the entire process of selling your restaurant, from valuation, through to marketing the business for sale, negotiating a mutually agreeable price, and ensuring meticulous levels of due diligence throughout.
With an unrivalled network of investor contacts, we not only know who is looking to acquire a restaurant like yours, but we also know how to present the opportunity to them in an attractive way, cutting down the time it takes to find a proceedable buyer, while expertly negotiating a price you are happy with.
If we do not believe your restaurant to be saleable, we will tell you so, and you can continue working with your licensed insolvency practitioner to determine the next steps for your restaurant.
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If your restaurant is currently experiencing financial difficulties, including squeezed cash flow and falling income, all is not necessarily lost. While some restaurants will inevitably be forced to close after suffering a financially challenging period, many more will be able to be saved if an appropriate plan is put into place in time.
Turning around a struggling restaurant can come in many forms, depending on both the source and the scale of the challenges being faced.
Depending on the root of your current problems, your business may benefit from an injection of capital in order to boost cash flow and allow you to continue meeting your outgoings as and when they fall due. Our in-house team of commercial finance experts can work alongside you to assess the level of funding required to make a difference, as well as your restaurant’s ability to repay this borrowing. We can scour the whole market to find you a channel of funding which is affordable to your company both now and in the future, allowing you to kickstart your operations on a solid financial footing.
If your current problems have caused you to fall behind with creditors – whether these are trade creditors, your bank, HMRC, or a combination of all three – embarking on a negotiation process can not only ease strained relations, but also free up cash flow and provide a level of certainty going forwards.
Depending on the scale of your current debts, negotiation may take place through informal channels, or through a formal agreement such as a Time to Pay Arrangement with HMRC, or a Company Voluntary Arrangement (CVA), which is a formal insolvency process.
A CVA allows an indebted company the chance to restructure its borrowings with a variety of creditors, by effectively using future earnings to repay existing debt. Due to this, in order for a CVA to be possible, you must be able to demonstrate to your creditors that your business is financially viable over the long-term and will therefore be in a position to see out the term of the CVA which typically lasts between 3-5 years.
Your appointed insolvency practitioner will draw up a proposal detailing the financial position of your restaurant and a proposed repayment amount, and creditors will be invited to vote on these plans. At least 75% (by value) need to give their consent; if this happens the agreement becomes legally-binding on all parties.
For smaller companies an accelerated version of the CVA method, known as a Fast-Track CVA may be more suitable. The Fast-Track CVA process is a more streamlined version of a standard CVA and requires significantly less input from an insolvency practitioner. This cuts both time and costs, and is particularly suitable for those restaurants who, prior to COVID-19, had been performing well.
Alternatively, placing the company into administration may be a better option, particularly if your restaurant is on the receiving end of growing creditor pressure and escalating debt. When a company is facing the prospect of litigation, including the possibility of creditors issuing a winding up petition, time is very much of the essence. If you do not move quickly, your restaurant could be forced into compulsory liquidation; however, acting too quickly can lead to rash decisions being made that may not be in the best interests of your restaurant or your creditors.
If your restaurant enters administration, it is immediately given legal protection by way of a moratorium. This acts as a sort of ring-fence which not only stops creditors from commencing legal proceedings, but also halts any ongoing legal action while the company is in administration.
Administration is not a state your restaurant can remain in; however, it gives your insolvency practitioner the time and space needed in order to devise a plan for the future which may involve getting the company back on its feet, or alternatively, it may be decided the company needs to be liquidated.
As the owner and limited company director of a restaurant, you may be aware that in the event of your restaurant becoming insolvent and entering liquidation, your employees will be entitled to claim redundancy.
What you may not know, however, is that as director, it is very likely that you too will have a legitimate right to claim redundancy. If you have worked for your restaurant for at least two years and have been paying yourself a salary through PAYE (even if this is topped up by dividends), you may be classed as an employee and therefore eligible for redundancy if your restaurant enters a formal liquidation process such as a CVL.
As part of the liquidation process, your appointed insolvency practitioner will be able to refer you to a fully regulated claims management firm who can help you discuss your director redundancy claim further.
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