Now is the time to negotiate terms.
Across the county, the coronavirus has shuttered countless restaurants or temporarily disabled others. For other restaurants, it’s a time to financially pivot to get a foothold on a healthy financial future.
You don’t have to be a financial ninja, but there are a few things you can do now to help your restaurant survive in a post-quarantine world.
One critical area you need to look is your current lease and if now is the time to negotiate lease terms with your landlord.
We encourage restaurant owners to be as transparent as possible with your landlord. Prove that you’re a valuable tenant and you’re making every effort to stay in business for the long haul. Be specific about what type of relief you need whether that’s rent forgiveness or a deferral. And if you don’t truly need assistance or relief, don’t ask for it. Now is not a time to squeeze extra cash from a landlord who is dealing with troubled tenants.
In addition to being transparent, you’ll need to be prepared to have the financial conversation and have your financial house in order. Demonstrated financial stability and consistency with loan or rent payments will go a long way to build your financial credibility.
Let your landlord know the additional measures that you have taken or are going to be taking to make sure that you are doing your best to stay current on your lease. This could have been through the SBA PPP loan forgiveness program, EIDL program, or possibly other sources of additional financing available.
One of the most important things you can do is create a projected financial statement which is a forward-looking financial report based on assumptions or hypothetical conditions about events that have occurred in the past and may occur in the future (think pandemic!). We suggest reviewing at least two years of prior financial and accounting data when putting your pro forma together.
Restaurant owners should create two or three pro forma financial statements based on various scenarios (or what you think may happen based on what’s happened in the past). The pro forma should be based on look forward 12-month period. In addition, gather POS data and sales tax returns.
Include assumptions based on how the pandemic has impacted your restaurant. Are you relying more on delivery services? As reopening happens, what is the capacity limit as required by your local area? Are you going to have to pay more in wages to entice employees to leave unemployment to come back to work? Are you going to incur additional costs due to fluctuations in supply chains or supplies? What costs are you going to incur for additional cleaning supplies and training employees? Do you need to make investments in technologies to manage guest traffic and online orders?
Considering the number of unknowns in the restaurant industry right now, we suggest you invest time to build a solid projected financial statement.
The point is to create a scenario, backed with financial information, so you have options in your discussions with your landlord.
If working through a projected financial statement is difficult for you, get help from an accountant who knows the restaurant business. It’s critical that you’re clearly laying out what your assumptions are before having a conversation with your landlord.
Now that you have a projected financial statement ready for discussion, let’s shift to your lease arrangements.
If you’re at a point to renegotiate, one arrangement to consider is adding a percentage lease component. Generally, in these lease arrangements you will have a lower base rent per month until your sales exceed a “breakpoint” determined in the lease. This breakpoint is normally an annualized sales total that is due in a lump sum after the preceding year had ended. If the breakpoint is never met, then the tenant only owes the base rent requirement. This arrangement ‘eats’ into your profits but is an option if you’re struggling to help lower the monthly fixed cost.
Another option is to negotiate a lease extension. Generally, leases are written on five, seven, 10- or 15-year terms with possibly two or three renewal options. Another strategy is to waive some of your options to give your landlord the ability to lock in the lease terms over a longer period of time.
When you are negotiating with your landlord, be sure you have a common definition of “gross sales,” which can mean something different to your landlord. Gross sales generally include pre-discounts (promotional offers, etc.). It’s not the actual cash you’re receiving. Your landlord may define gross sales very differently.
Investing time to build your financial projections, clearly communicating with your landlord and understanding your lease or rental terms are three ways to increase the likelihood of keeping your restaurant’s doors open for a very long time.
Alex Gray is a Tax Accountant for Mize CPAs Inc, a tax, payroll and consulting firm focused on restaurants nationwide. He understands the restaurant industry having launched his restaurant career starting as a line cook in high school and eventually working his way up as both a front-of-house, and back-of-house operations manager. At Mize CPAs, Alex works with restaurant owners needing help with tax, payroll and consulting. His background includes positions as a corporate controller for a 140 location quick-service restaurant group and as a controller for an independent restaurant organization. You can reach Alex at email@example.com