Restaurants, bars next to suffer credit crunch
By GREG NINNESS - Sunday Star Times | Sunday, 07 December 2008Restaurants and bars are likely to be the next victims of the recession, according to insolvency expert Gareth Hoole.
Hoole, who heads up insolvency services for accounting firm Staples Rodway, said the credit crisis and the associated recession had so far followed a predictable path, with the property slump pushing developers and building firms into receivership and liquidation.
They were now being followed by retailers who were starting to join the ranks of businesses going bust.
Next up would be the hospitality sector, although it probably wouldn't start striking serious difficulties until next year, he predicted.
Businesses which were reliant on overseas tourists would be helped by the falling NZ dollar and this country's safe destination reputation, but even that would not be enough to offset lower visitor numbers as people in countries like the US tightened their belts and decided to holiday at home.
Restaurants and pubs which relied more on local customers would also be hit, as consumers cut spending and concentrated on reducing debt.
"That's one of the sectors that typically gets hit fairly quickly in an economic downturn," he said.
Even in good times the industry had a fairly high failure rate, although so far it was no higher than normal. "But I think it's something we'll see more of next year," he warned.
Restaurant and bar sales specialist Wendy MacGregor of property consultancy Match said there were few signs of forced sales, but businesses were taking longer to sell with finance harder to get.
The effects of recession were not felt across the board, she said. "Most of my clients who own bars the better ones anyway their sales are up. It's probably due to everyone drowning their sorrows."
But although they drink more, they eat less, she said, and restaurants were suffering more than bars. "I know of one chain that's experiencing a 16-18% downturn," she said.
Hoole said there were some common themes among businesses this round of failures.
Some people had bought businesses with overly optimistic expectations about their potential. Often this was financed with short-term borrowing and when the business failed to perform as expected, they struggled under too much debt.
Another facet of the current climate was that many of the businesses going into receivership were trading profitably.
Their problem wasn't profitability, it was cash flow, Hoole said. This particularly affected businesses selling on credit. Often customers would take 30, 60 or 90 days to pay their bills and at the same time, sales may have slowed so stock levels were too high. So although the company may be selling goods at a profit, most of its working capital was tied up in its debtors' ledger and inventory.
Normally a company in that situation would go to the bank and ask for more credit, but in the current environment banks were often asking firms to reduce their overdrafts, Hoole said.
So they just run out of cash and that sends many to the wall.
Hoole said businesses often feared the high cost of calling for help.
"We charge hundreds of dollars an hour, and insolvency matters can require some intensive work."
Against that owners must weigh the cost of failure, where they will lose their investment in the business and the income it provides and potentially other assets such as their house if they have been used as security. Others are also affected, as employees lose their jobs and suppliers lose money for goods already supplied and the opportunity to make further sales through the business.
"So $30,000 or $40,000 of professional fees wisely spent could prevent the loss of millions," Hoole said.
SURVIVAL PLAN
* Always register a charge on the Personal Property Securities Register for any goods supplied on credit. This puts the creditor ahead of other secured creditors, such as banks, in the queue for payment.
* Try and extract a personal guarantee from customers where possible, although this is not a magic bullet. The customer may have no assets and a guarantee could be costly to enforce.
* Do not use the IRD as a bank by delaying payment of taxes. It is particularly important to pay PAYE and GST as they fall due.
* Banks hate surprises. If you strike problems, talk to the bank, the IRD and your creditors about your situation. If you are prepared to be proactive and get on the phone, often they'll look at ways to restructure things that can help.
* Talk to an expert as soon as problems become apparent. If help comes too late it may not be possible to sell the business as a going concern.
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