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An insolvency practitioner’s tips for closing a failing restaurant

 

Sometimes, despite the best efforts of its management a restaurant simply can’t be saved. That’s when an operator consults an insolvency practitioner. As part of the restaurant network Dean Gambles & Co endorses a range of fellow hospitality professionals with whom we have had consistent dealings over many years and whom we believe meet the standards of excellence we set for ourselves.

Here we talk to Kevin Goldfarb, a Partner and licensed Insolvency Practitioner at Griffins. We ask Kevin about common mistakes restaurants make when they are forced to wind up operations and how to avoid them.

 

No shame in closure

Discovering your restaurant business is failing is never an easy moment, but it’s nothing to be ashamed of. Even in the best of economic times many restaurants tend to close as trends, areas and lifestyles evolve. Now, at a time of rising inflation, record energy prices and labour shortages many restaurants are finding their foundations shaken by factors beyond their control.

More than 1,300 restaurants became insolvent in the last year. And that was according to figures released from March – before the full extent of the crisis kicked in. More recent figures estimate numbers of restaurant insolvencies are up 60% on last year.

Sometimes, when managing a failing business, it might be tempting to take one’s hand off the wheel. In fact, the process of closing a restaurant requires an operator’s full attention and the adoption of a strategic approach.

The speed and efficiency with which an operator can wind up an existing concern, often has a major bearing on how quickly they will be back on their feet and ready to launch a new venture.

Why seeing an insolvency practitioner could be a vital step

Insolvency practitioners (IPs) are licensed to act on behalf of companies and individuals when they are facing insolvency. But often the best time to contact an IP is during a period of acute financial distress – giving you more time to work towards an optimum solution for your business.

Crucially an IP might be aware of options a business owner didn’t even know they possessed, says IP Kevin Goldfarb.

“When a business is moving towards an inevitable liquidation, the IP can give the owner realistic options, such as re-purchasing the business, minimising or avoiding personal liability,”

Even if the IP’s main function is to provide advice, bear in mind that they are used to absorbing information about businesses and giving dispassionate, practical advice. Other business owners or sources of advice may be swayed by personal loyalty or other sentiments.

“That’s understandable, but it works against the company,” says Kevin.

Reading the writing on the wall

One of the most common mistakes restaurants make is to fail to read the writing on the wall and act too slowly.

“A lot of businesses think, and very nobly so, that they’ll try and trade out of it. They’ll bet on having a good Christmas or summer and that then things will improve,” explains Kevin.

“However, sometimes it can be better to get that advice early to make sure they don’t inadvertently make the situation worse by continuing to trade.”

A particular problem at this time for restaurants is under-capitalisation – where businesses simply don’t have enough cash to stay afloat.

“That can be satisfactory as long as the business is making a profit, however in the last two years we have seen the effects of a pandemic, increases in minimum wage and the energy crisis — all of which contribute to uncertainty,” says Kevin.

Many businesses have accumulated debts to their landlord after not being able to pay rent during lockdown. Seeking advice from an Insolvency Practitioner can help here too, as they can help you to negotiate with creditors, and find the best way to manage the situation.

Setting the wrong priorities

Another common mistake is trading on at a loss and incurring more debt with some suppliers while only paying necessary bills and not others.

“Again, a lot of people do that in a very noble way but they are only avoiding an inevitable problem.” adds Kevin.

And many businesses wrongly choose to assume that insolvency is automatically the end when it does not necessarily have to be. Instead, Kevin says, it could be an opportunity to re-establish on a firmer footing.

How to make insolvency less painful

Many businesses find themselves in a kind of limbo where they are effectively insolvent but not yet involved in a formal insolvency procedure. If you’re an operator and suspect that this might apply to you, you would be advised to do the following:
• Keep good records of your decisions, it helps to clarify your thoughts and explain your decisions at a later date.
• Maintain good communication with your creditors. “It can be difficult to talk to them about being unable to pay, but worse to leave it. Typically they’re more likely to be sympathetic if they hear it from you, rather than find out by not receiving payment,” Kevin adds.
• Speak to your accountant, or even an insolvency practitioner – it is not an admission of failure. “Hiding your head in the sand will not solve matters,” says Kevin.

What an IP can do for you

An IP can offer you the kind of hard-headed, dispassionate advice that is most likely to help you keep your head above water, even if you can’t save the business.

“Many restaurants are now trading with new companies with stronger balance sheets after situations where their previous company accumulated unbearable debt,” adds Kevin.

If you need professional insolvency advice, please contact Griffins on +44 20 7554 9627. If you’re interested in purchasing or selling a restaurant or have any other restaurant-property related queries, please contact Dean Gambles & Co on +44 20 7078 7464 or info@deangambles.com.