Restaurant and Bar Best Practices – Surviving Covid 19, Stay at Home and Shelter in Place Under the New ABC Waivers
By: John Hinman & the Hinman & Carmichael LLP Team
March 20, 2020
Introduction by John Hinman
On March 19th Governor Newsom ordered Californians to Stay at Home (“SAH” - the state version of the 8 county “Shelter in Place” [SIP] order on March 17th) in an attempt to slow the spread of the Covid 19 pandemic. Eminent physicians across the country are calling for an immediate national SAH or SIP policy to halt the pandemic and save lives. As members of the regulated food, beverage and hospitality industries we all have a responsibility to our fellow citizens to cooperate in the challenges of defeating the pandemic.
Industry members are gathering as individual businesses and as industry organizations to figure out strategies for economic survival while our public health community grapples with life and death decisions.
It seems like I served in Vietnam a century ago but the memories, one particularly, never left. Every time we left base camp, we repeated the four steps of First Aid like a mantra: (1) stop the bleeding, (2) clear the airway, (3) protect or treat the wound and (4) prevent or treat for shock.
This comes back now because we are on step one – stop the bleeding - and we have three to go. Medical measures to save lives are step one and the SIP/SAH orders are essential. Step two is testing so we can all take a deep breath and know that we are (or are not) safe.
This post is about preparing for steps three (treating the damage) and four (managing shock by preventing panic and overreaction). The steps below were adopted from the March 19th Nightclub & Bar webinar on Covid 19, and from the March 19th meeting of the California Music and Culture Association (CMAC) to consider responses to the economic fallout from the San Francisco SIP order. The ABC’s announcement (during the evening of March 19th) of regulatory relief lends urgency to licensee analysis of planning options.
Overview and Number One Economic Priority– Protect Cash
By : The Hinman & Carmichael Team
The harsh reality is every bar and restaurant business must plan for at least 90 days of little or no revenue. Bar and restaurant businesses can survive at most for 30 to 45 days without help. Governor Newsom ordered the entire state to SAH effective midnight March 20, 2020. Other areas of the country where there are pockets of the virus (for example, New Rochelle, NY) have issued similar orders. It can be expected many other areas of the country will follow with similar orders. How long the SIP/SAH orders will remain in effect is not known but three to six months is possible.
The key to survival is to PLAN, PLAN, PLAN and the first essential task will be to plan how to preserve cash reserves.
Now is the time to investigate financing options, particularly new government low interest loans developed to help businesses through the corona virus outbreak. If this is your option of choice, get in front of the line now rather than waiting too long.
Another proposal is to lobby to convert small business loans into grants if it can be shown the loan was used for rent, and payroll. Many opine that more debt will only dig the operator into a deeper hole, so grants are the most viable mechanism to a good ending.
Consider this time as a time to reflect, plan and “take our medicine” now so that optimistically the enterprise can re-open - perhaps in April or May, perhaps in June. Demand will explode when the SIP/SAH orders are lifted and being ready (having employees, having stock, being able to service the public) for that re-opening will be the challenge, and the goal.
Cash Flow and Finances
Preserving cash is critical for the immediate period – Use the Relaxation of the ABC Regulations to Your Advantage.
· The most important thing right now is to stop the bleeding. Hope is not a strategy. This is the time for careful review of finances, operations and costs.
· Helped by your accountant, develop several scenarios to determine what cash flow is absolutely necessary to make it through at least 90 days with little or no revenue. Questions include: Can you continue with a skeleton management team? Can you continue to pay employees? What about employee health care benefits?
· To preserve cash reserves, defer paying your vendors and landlords – even if you have the cash to do so right now. The most important thing to do right now is to preserve cash. Go through your costs and payables and contact your vendors and landlords.
· Ask the landlord for rent forgiveness or at least to defer rent payments due. In San Francisco, commercial evictions have been put on hold and now Governor Newsom has halted evictions for this interim period statewide.
· Ask your vendors to defer payments. It is wiser to pay later to assure enough cash flow for when it is time to re-open the business.
· Reduce your inventory now. Return inventory and take advantage of the relaxation of the ABC Tied House, Product Return and Credit Regulations.
· On March 19th, the California ABC issued a directive to temporarily relax regulations during theSAH/SIP period allowing flexibility to affected on-sale and off-sale retailers in selling alcoholic beverages:
□ While not required, wholesalers and manufacturers may develop rules to accept product returns – so check your inventory and return any inventory in excess of expected demand.
□ On-sale retailers may sell alcoholic beverages to off-sale retailers. If Restaurant wine lists are flush with expensive inventory, look to the inventory as a source of cash.
□ The rule prohibiting wholesalers from extending credit to retailers will not be enforced during the SAH/SIP period. Credit, however, can be dangerous because it adds to the future debt load so be judicious about taking down inventory on credit.
□ On-sale retailers (Type 41 and 47 restaurants, and Type 42 and 48 bars – we expect this also applies to all types of on-sale licenses, including private clubs and entertainment venues) may sell beer, wine and spirits (in original containers) for off-sale consumption. This waiver of conditions will now apply in metropolitan areas where the practice was prohibited.
□ Bona fide eating places (restaurants) may sell alcoholic beverages to go when sold in conjunction with meals prepared for pick-up or delivery. (This is also allowed in New York City and Alabama now.). This includes pre-made cocktails when sold in closed containers for take-home. However, the ban on containers with holes for straws means we are not anticipating that San Francisco and LA will become the French Quarter of New Orleans anytime soon.
□ Off-sale transactions may be made to persons outside the premises (including persons in motor vehicles) through a pass-through window. The impact of this waiver is unknown because most California restaurants (except for some fast food chains) do not have pass-through windows.
Regardless, these changes offer opportunities for sales to improve cash flow.
· Talk to your banks and creditors now. Try to defer payments or move to interest-only payments for this interim period.
· Talk to your state and local officials about abating sales tax payments.
· Be honest. Explain the need their help and cooperation so you will be ready and able to open for business again when the orders mandating closings are lifted.
· Assurances you will still be in business at the end of this period will go a long way to engender creditor, vendor and landlord help. Put yourself in the shoes of the real estate investor, the creditors and vendors. It’s in their long-term interest to make a deal.
· These are unusual times and most commercial laws and regulations, including the ABC regulations discussed above, are being waived or ignored.
Financing Options.
· The Small Business Administration is now offering Disaster relief low interest loans. You do not even have to submit a personal statement to apply. Research and apply for all available low interest government loans. It is not certain at this point what the ceiling will be for these loans but at this time, it appears to be up to $2 million.
· However, a word of caution: plan for the next 3 years, not just the next 90 days. Taking a loan will commit you to paying for those loans long into the future and equity is better than debt. Balance these pros and cons and ability to pay the loans into the future.
· Investors might be willing to infuse capital to help through the interim. If you have investors who will help, use them.
· File a claim with your insurance company even though it appears business interruption insurance will exclude the pandemic. Things could change with political pressure and you will have already filed your claim. (A restaurant/bar in New Orleans is suing the insurance company to cover the pandemic.). In San Francisco CMAC is petitioning the City for a declaration of a “Force Majeure” event that would support abating some otherwise contractually required payments for the period of the shutdown.
· If you can prove a person was in your location when having the virus, would that constitute physical damage because you must sanitize the entire place? Think about insured damages.
Developing New Revenue.
· Developing new revenue is a possibility that many are investigating by looking at new business models, including take-out and delivery (food and alcoholic beverages). Any new revenue is good but recognize this new revenue will never be enough to sustain the business in the same manner as when the business was at full operation.
· Using delivery services for takeout can also be very costly and might not be worth the effort if the costs are too high (although some delivery services are waiving portions of their fees right now to support their customer base). Use existing employees for deliveries. But do the math. It may work for some but not for others.
· Many businesses are allowing employees to sell gift cards for future restaurant use and providing the employees with generous commissions. It can bring in some future revenue for both the business and the employees. Gift cards for future meals (if sold) can also assure creditors there is a viable business when it reopens. We see no downside to this tool.
Employees.
· The uncertainty is hardest part right now for both employers and employees. If after your analysis with your accountant you cannot continue to pay your employees, it is better for them to lay them off now.
· Allow your employees to know sooner rather than later if they need to seek a new job or file for unemployment benefits. Paying them for a short period and laying them off later will not help them. They should be in the front of the line for government benefits. This is the hard part of planning.
· As hard as it will be, explain the need for a layoff or furlough until the business can re-open to full operations. Communicate what you can and cannot do for them and the prospects of having them return once this SAH/SIP period is over.
· Now is the time to review your employees to determine which ones have been essential. The team members kept should be the ones most needed; even if it’s a skeleton crew. These are the salaries that need to be paid.
· Employee health care costs are another serious concern. Health care is a big expenditure. Are the employees able to go on COBRA? The reality is that most cannot afford COBRA. The trade associations need to work with the government to provide health care relief for the laid off employees. Lobby for this relief.
· Some businesses have set up “Go Fund Me” sites to help raise money for their employees. There is no shame to ask help from the community members able to help; although this is not a panacea and is not sustainable for the long term.
· Stay connected with your team. Over communicate to let them know you are working to re-open as soon as possible. Have virtual happy hours. Keep your team together. If you are still providing food, feed your team.
Returning to Normal?
· We will eventually return to “normal” although the new normal may look different than it does today. The good news is that Hong Kong and Singapore are already beginning to re-open now.
· When the SAH/SIP orders are lifted, people will be eager to get out. They won’t want to stay home, and there will be a stampede to get out of the house and re-socialize with friends and colleagues. This is the time to get prepared.
· Use this time to develop comprehensive plans for finances, marketing and operations. This is a time for “re-set”. Dig into the details and prepare to come out better organized for success.
· If you aren’t a business planner at heart, ask help from someone you know who is.
· Provide what help you can and communicate with members of your community. Be involved. Help schools and food banks. People will remember.
How to Approach this Period with the Government, and Yourself
This crisis is not the fault of the general public. Our government was charged with the responsibility of protecting the public – and the government failed. We view this as a time-out for health reasons. Ideally, vendors, landlords, banks and tax collectors will view this the same way and will forego collecting their revenue while you cannot collect yours.
There should be no business expenses assessed during a period when no business can be conducted. This applies to all Bars and Restaurants (even those with minor revenue from take-out). That will preserve cash for the period when business recommences. That would be an investment in their customer base by those to whom Bars and Restaurants owe money. That is a good investment for them to make, and we encourage it.