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John Gordon - April 2020



Controlling What We Can During the Ultimate Black Swan Event of Our Lives

by John A. Gordon, Principal and Founder, Pacific Management Consulting Group

Wow ! What a difference a month has made. Life, always unpredictable, has veered towards matters of survival of our families, our employees, our guests, the business, our stakeholders and our nations. The long time heroism, generosity and resilience of the United States, told and evident throughout our long history as a nation is just now coming out after a short period of shock.

The magnitude of this shock is of course a black swan, an event so rare, almost paranormal, that you can’t believe your eyes. Virus and pandemics were not unknown—see the Spanish Flu of 1918-1920. But CV-19 as I call it has hit our industry at a bad time—at the end of winter, at a period of time when some brands and operators were stressed with operational and financial challenges, such as too high debt levels versus cash flow generated , too much competition, too high rents and too little staff.

Several things are very clear now:

First, take care of yourself, your family and health and welfare.   Eat and get sleep. Get some exercise. Realize that we can live through this. Maintain a daily to do list and a journal, list your priorities and fears.

Don’t blow the relationships with your people.  Think about what you can do for your people and remember, at core, we are a people business. Already, I’ve seen one major public brand that has retreated into almost total cost containment mode and has practically no restaurant hourly personnel, store management or headquarters staff flexibility. That’s a terrible position to be in this early in this cycle. How will your brand restart?  Who will try recontact the employees and see if they might come back to work?  Perhaps that brand needs a team of managers and key hourly employees by region, by DMA or some other logical geography to keep the lights on to get some work done in the units and lay the plans for restart.

Realize a lot of money is necessary for both company owned and franchise brands to keep the brands running. 

Liquidity—the money sitting in your bank accounts-- is what your restaurants will survive upon. Recommend you never get caught without it again.

Restaurant brands that were “too creative”—meaning too high-- in the debt leverage department are now in trouble with no revenue coming in. As an example, Bloomberg reported that two months after taking out a loan that enabled Tilman Fertitta to take a $200M dividend out of his casino/restaurant company, conditions have now radically changed:

“Billionaire Fertitta Offers Record 15% Loan Rate To Save His Casino/Restaurant Empire” <1>

Keep in mind talk about the danger this kind of high debt was very common for months before this crisis hit. With no revenue coming in, it won’t be long for some brands to hit the trip wire. Make sure that you have a solid cash flow forecast in place with best case and worst case scenarios. You will need to plan for funds to reopen. If necessary, take the time now to read up on the rudiments on Chapter 11 and Chapter 7 theory now, before you have to hire advisors and attorneys.

The “asset light” franchisor brands aren’t thinking so asset light right now either. For example, McDonald’s has drawn down its line of credit. By definition, they are not asset light anymore, it may need the cash for any number of reasons, best to draw it while they can. This is responsible management on their part, they are thinking about the 95% of their system that is franchised.

Be realistic (conservative) about how long it will be before business resumes. Watching the data charts of the CV-19 sickness is a good investment of time. It is very likely governmental entities at any level will not blow the all clear whistle until the number of new cases falls off and does not respike up. Particularly for full service restaurants, some polling is out that would indicate that guests will come back over time as they feel comfortable and safe.  When will that be? No one really knows at this time.

The loan programs…..Could be of use.  There are two loan pools, a large/medium company (the $500 billion loan pool for employers of 500 employees or more) and the $349 billion SBA backed loan pool. Not much federal guidance on the $500 loan pool is out yet. There are some limitations.  For the large/medium company loan pool, no stock buybacks or dividends are permitted while the loan is outstanding. And there is a limitation on executive compensation, 2 times that of 2019. For the $349 billion SBA loan pool, employees have to be rehired, and 75% of the loan must be used for payroll. Other than slow execution through the banks that may be confused as to the federal guidelines, the risk is that restaurants will have to rehire employees before there any operational need for the employees .  The terms of the $349M SBA loan pool is attractive if you can get the funds: 1% interest rate, 2 year loan term, potential forgiveness.

This will be a wild, wild time.  The Wray Executive Connective Connection will keep publishing as will other industry resources. Read them. Stay in contact with your friends and connections. It is very likely there will no major industry conferences until later this year at the earliest. Keep your network finely tuned.

About the author: John A. Gordon is a restaurant analyst and management consultant, with 45 years in restaurant operations, corporate staff and management consulting roles. His founded consulting firm, Pacific Management Consulting Group, works complex operations and financial analysis projects for clients, including investor due diligence and litigation support. He is always reachable at jgordon@pacificmanagementconsultinggroup.com, office 858 874-6626.    

<1>    https://www.bloomberg.com/news/articles/2020-04-06/landry-s-brings-first-u-s-leveraged-loan-in-almost-a-month

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