Protect Your Hustle!: The New Way To Do Business in Hospitality
Originally Published : February 7, 2022
Dear HL Clients and Friends,
There was a time in NYC when a restaurant or bar could succeed if the owner was a hustler with well-honed hospitality chops, a clear vision and a few bucks behind them. You might have to endure a temporary setback like the 2008 economy collapse or Hurricane Sandy in 2012 or 9/11/01, but you could survive it by working extra hard and perspiring through the pain to get to the other side. These events were always a tough slog but we accepted them as part of the gig.
Well, we realize now that we have to be better prepared for the new variety of disasters waiting in the wings. When the next bomb-cyclone storm hits or protest erupts or virus re-emerges and the tourists stay home and our customers run to the hills or, god forbid, Florida, we will be better situated because we have learned some things and we have started making changes.
Understandably, changing our ways can be rough especially when the nerve endings in our heads and hearts and in the pits of our stomachs are leathery from overuse. So, let’s be kind to ourselves and give our emotions time to heal. We will proceed coolly, transactionally but with great resolve as we make some fundamental changes in how we do business that will allow us to withstand future big events and survive in the industry that we all love.
Let’s start by reviewing and resetting all of our agreements for everything hospitality. Bars, restaurants, management deals, wine shops, catering, all of it needs a fresh look. Personal guaranties on your lease? No more. Baldor accounts and bank loans where you are the only one taking the risk? Over. Investors reaping all the rewards from your hard work and sharing in none of the pain? Forget about it. Then, let’s look at how we can protect ourselves from becoming the punching bags of never-ending wage and hour, ADA and other lawsuits that just crush our souls along with our bottom line. And while we’re at it, we can explore ways to cut costs and keep more of our hard-earned money in our pockets with advice from our accountants and insurance brokers. Every little bit helps.
The ideas for change laid out in this edition are both practical and aspirational. You won’t be able to implement all of our suggestions but some of them are bound to stick. We have to tackle this industry-wide reset one deal at a time and we need to start somewhere. Many of you are phenomenal business people and you like to make the deals yourself before you get us involved and that’s cool. Just read what we have to say so you can be informed and make the best deal possible.
Change is hard. You may have to walk away from some opportunities because those with the power don’t like to give it up so easily but hang in there, stand tough and ask for what you know is right and eventually you will find a better deal with more honorable people and the next time the shit hits the fan, you will be happy that you have a shit-resistant raincoat.
When we all stand up for ourselves, our landlords, vendors, investors, politicians and community boards won’t be able to avoid the wave and will have to start conceding little by little. The movement starts with us, the owners and the lawyers and everyone who makes a living in hospitality. Demand a level playing field, fight for what’s right and fair in every single deal, lease and contract and the tide will turn from the force of our will.
Here are ways to take action and protect your hustle:
Embrace Force Majeure
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The Force – It’s important to explicitly include COVID-19 and “pandemics” in Force Majeure clauses in all of your contracts. What happens if an event is delayed, or you don’t hit your numbers in your management contract or you run out of money because of the pandemic? Don’t let a judge decide your fate; do these things:
In Catering/PDR/Event contracts:
– Get a deposit for everything and include:
– Owner can’t be sued if the event can’t be held due to The Force
– Client is required to reschedule if possible
– Owner gets paid (usually keeps deposit) if client can’t/won’t reschedule
In partner/investor agreements:
Share the load and don’t bear personal liability alone; negotiate with your partners to have them contribute their ownership share to anything owed to vendors or your landlord if The Force knocks you for a financial loop. If you have personal exposure, now you have some coverage.
Don’t be afraid to request concessions from your landlord when The Force hits and include these terms in any new lease! Here’s how:
In lieu of base rent, offer to pay a:
a – Straight percentage of gross revenue; or
b – Lower Base Minimum Rent plus a percentage of gross revenue.
If your landlord is not open to a percentage rent relief deal, here are some other options:
Abatement based on capacity – Consider the maximum amount of rent that you are able to pay if you are take-out only, limited indoor dining and outdoor only – a provision should be agreed upon that provides a mechanism to abate rent by a certain percentage based on the capacity of the restaurant.
Abatement and extension – In an abatement and extension rent relief deal, 100% of the base rent is abated and the term is extended day for day during such period.
While you’re at it, think about your leverage with your landlord. Study your street and neighborhood, become friends with your competition and know their rent and use that to figure out if your landlord can afford to lose you. Are you their best option? If so, negotiate differently. Also, in the good times, try to be good to your landlord, make yourself human to them, and be a good tenant so you can get through it together.
— Andrew Fine and Mayan Bouskila
Know How to Let Employees Go
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Furloughs and Layoffs
You have to know how to quickly furlough or layoff your employees if The Force hits and you have to shut down or scale back. Know the difference between the two and know how to do it right.
A furlough is a temporary and unpaid leave during which your employee remains on your payroll, but in an unpaid status. Think of this as an extended scheduled cut due to temporary closure, like those due the weather, a utility outage, or the run of the mill Covid spike. When you furlough, or temporarily close, or cut your staff hours, you do so with the intention of bringing your employees back to work, when you are able to do so.
A layoff is a non-performance related termination that can either be permanent or temporary. Think March 2020, when we were closed for the foreseeable future. You have to pay out your employee’s sick leave and send them notices of termination.
Furlough or layoff, it is best to promptly communicate with your employees regarding any schedule changes or cuts to their hours. Be open and honest with your employees, but don’t make any promises about continued employment, layoffs, future re-hires, unemployment eligibility, etc. You can try to answer all their questions and it’s ok to say “I don’t know”. Let your employees know they have been heard and tell them you will get back to them and make sure to follow through
Have your employment practices down. By this we mean having up-to-date, complete and accurate personnel files, job descriptions, onboarding packets and employee handbooks. With this work done, you can easily communicate (in writing) to your staff about their employment status and when the time is right, quickly bring them back on board—the right way! And if the WARN Act (NY or Federal) applies to you, have those notices pre-drafted and ready to go.
— Lee Jacobs
Own Your IP
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The most valuable intangible asset is a company’s intellectual property and goodwill. Your name and brand, your sales strategies, customer lists, copyrights and patents should all belong to you. Not your investors, but you, the owner.
If you want to license someone to run your restaurant in Japan or Paris or Dubai, it’s your IP that they want. If you grow your business and sell the whole darn thing, your IP better be secure. Protect it and own it from the start and file for a trademark.
Exploit Outdoor Dining and New Alcohol Rules
Sidewalks and Sheds – We expect that the rules regarding how structures can be built are going to change, so hold off on sinking tons of money into fortifying your outdoor dining until the DOT makes a formal announcement on what will [and won’t] be permanently allowed. We’re imagining it won’t be much different than what exists with the current program, however, we expect that the free ride is coming to an end and that you will just have to pay for it in the future. The guidelines will also change, and the rules will be much more aggressively enforced.
CO/LNO -Don’t let a C of O/TCO/Letter of No Objection or lack thereof prevent you from pulling the trigger on a new space. The Liquor Authority has recently announced that they will no longer be requiring these documents in order to activate a liquor license. Now, you will need to provide it eventually, but you’ll have until your first renewal to do so – which, in most instances is two years!
Alcohol to-go –This is NOT a done deal. If you want it to be, you better contact your local electeds. There is an active discussion happening in Albany, and if you’ve got an opinion, now’s the time to make it known. IF this program, does get the support that it deserves, and does become a reality, we anticipate that it will look slightly different than the 2020 version – think mixed drinks to go, but no full bottles of wine or spirits.
Temps! – As discussed in a prior newsletter, the Liquor Authority’s more broad Temporary Permit program is now underway in NYC. You no longer need to do an asset purchase agreement with a current licensee to qualify for a temporary permit. Effective immediately temporary liquor permits are available to everyone seeking a beer and wine license.
Full liquor permits are also widely available, however, there are a few more qualifiers to be aware of: the space must have been licensed within the last two years, it must not have been canceled or revoked during that time, you must be able to objectively show public benefit (get community board to support or issue no comment). And if you do obtain one of these full liquor temporary permits, you will have to close at midnight, 7 days a week, must employ only recorded background music, and agree to some other more minor operational restrictions while you operate on the temp.
–Heather Kirk and Joey Regs
Prevent Pesky Lawsuits
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Stop ADA lawsuits – retail spaces and websites
ADA lawsuits (accessibility to your space) can cost you if you don’t know how to play the game. The statute caps the plaintiff’s damages at $1,000, but legal fees for the bottom of the barrel attorney that brings the case is not capped and you will need a lawyer to defend you and the landlord and her attorney are going to get in the mix and charge you and before you know it, you are out 10K or more. Unacceptable.
The best defense is a good offense. Here, that means acknowledging that there is a requirement to be as accessible as is reasonable. The DOB does not enforce the ADA, and just because they let you open with the 10-inch front step, or super small bathroom, does not provide a defense to an ADA lawsuit.
For websites, this means ensuring that your site is accessible, especially for those with vision impairments. There are several companies, like Audioeye, that will monitor your website and ensure it is compliant.
Our litigation team offers ADA inspections to provide you with an assessment of any potential issues, and highlights those that may require an expert opinion (looking at you, front step). Before you start your build-out, we recommend reviewing the potential ADA barriers that may exist in your space so you can handle them at the outset. Even for those who are beyond the build-out phase, it is not too late to become compliant. The risk of ignoring this obligations can cost you a lot more down the line.
Redo Your Insurance
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Call your broker about these things:
Sidewalk, street and bike traffic create potentially unsafe conditions for your patrons and your employees. Adding an additional $1mm of liability coverage such as an Umbrella policy would help cushion your business in the event someone gets injured – or worse.
If the alcohol-to-go program returns, think about increasing your liquor liability insurance.
If you have a considerable investment in your outdoor dining space, make sure to add the additional value to your property insurance. It’s no different than covering what you have built out on the inside.
The pandemic once again reminded us of the importance of Employment Practices Liability Insurance (EPLI) – specifically wrongful termination. The shedding of payrolls has led to an increase in wrongful termination claims that will probably continue for quite a while. EPLI can protect employers against wage & hour, discrimination, sexual harassment and ADA incidents at the workplace.
Unfortunately the insurance carriers are still not including coverage for loss of business income due to the pandemic downtime. But through this experience we have cultivated other ways to try and remedy the negative effects if another shutdown were to occur:
Ask your insurance carrier to do a midterm audit. If you can reduce projected sales of food and/or liquor you can reduce your premium almost immediately!
Remove coverages such as liquor liability and products for the day’s we were not operational Explain more)
Next time you shut down: Change your policy to a non-operational, vacant space policy. These policies can be written on a 3-month short term basis, very inexpensively and is the perfect remedy for this type of downtime.
–Eric Wiener (Madison Ave Brokerage)
Reorganize Your Personal Property
These are things do before you get into serious debt. But once you’re in the shit with debt, you can’t mess with moving around your assets to avoid your creditors.
If you are married and own a home, find out how your property is titled. Your “marital home” may be offered special protection from creditors. This can often be the single easiest way to protect your home.
If you have a spouse who is not involved in the business, for second homes or vehicles, the non-business owner spouse can/probably should hold title. There is other property that is exempt from creditors like retirement accounts.
If you have a family, you could create a bank account in a child’s name that a creditor can’t reach, though again, it has to be a true account for your child – you can’t just use it as your own or take money out of it in the event of emergency.
You get the idea. Talk to an estate or bankruptcy lawyer about how to set up your assets so you can sleep at night and not have to worry about losing it all the next time disaster strikes.
— Alanna Morgan
Improve Your Relationship with Money
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Keep your Bankers Handy – Maintain your current banking relationships and develop others within your network to have an opportunity to obtain financing to help build a cash reserve. Right now, Dime, Chase and M&T Bank are offering Lines of Credit up to $100K with a hassle-free application process.
Stay Ahead of your Investors – Propose a holdback percentage of distributable cash to build cash reserves and notify investors of the potential for a capital call should an “event” take place.
Budgeting – Review your budgets and related performance. It is critical to stay ahead of the curve and have a true understanding to the financials of your operations to make real time decisions.
Get Tax Credits – Take advantage of all available tax credits such as Employer Retention Credit (ERC), TIPs Credit and Research & Development Credits (R&D), etc.
–SMG (Scotto Melchiorre Group)
Diversify Your Portfolio
It’s time to move beyond a brick-and-mortar only model for your restaurant group. Get your IP and your brand in order and get out there. Explore these deals:
Management Agreements – developers are hip to the fact that great F&B concepts in their buildings attract tenants and allows them charge more on the floors above. Find an F&B consultant who works with the developers and pitch them a concept and foster a relationship.
Licensing Deals – Abu Dhabi was on a spree for a while. Japan and Europe were also getting into the game of bringing hip Brooklyn and Manhattan brands overseas. Nice deal for owners on these IP deals. Get a development fee and a piece of the sales and profits for teaching someone how to set up and run a version of your restaurant. All for developing your cool brand.
Franchise – If you have a concept that you can adapt to a fast casual one (where you can centralize your food production and distribution to start), think about turning it into a franchise.
Consulting Deals – like a management agreement but smaller. Lower fees but much less workload. Usually with smaller hotels; prepare a menu, train the team, be on standby. Development fee, then an ongoing management fee. A small and sweet deal.
Media – I don’t know, become a hospitality influencer or create some content or something. Or get on TV and expose yourself. Or sponsor some products. Sell out wherever possible.
Distribute – Goldbelly has been good to our clients. Find a way to get your products out there to the world outside of NYC.
As the good ‘ol Grateful Dead like to say: “I got a feelin’ there’s no time to lose”. Amen to that.
Hang in there,
P.S. As always, you can reply directly to this email with any comments, questions or suggestions and I respond to all.