How do you get back on your feet after going into administration? Frank Leggett investigates.
Hospitality is a volatile industry. Restaurants and cafes work on wafer-thin margins and are at the mercy of public whim. It doesn’t matter if it’s a start-up business or a well-established restaurant, when financial obligations can’t be met, they are forced to shut their doors and go into administration.
Having a business go into bankruptcy can take a huge toll—not just financially but personally, emotionally and even physically. However, the lessons learnt from seeing a restaurant go under can be the backbone of a new and financially viable business.
No-one takes going into bankruptcy lightly—nor should they. It will have a long-term effect on your ability to own a company and to do business. When a business becomes insolvent, it enters into either voluntary administration, liquidation or receivership. The directors of the company are not responsible for the day-to-day debts of the company. One important exception is when they have signed personal guarantees. These often include business finance owed to the bank, and the lease of premises and equipment.
“A personal guarantee makes the directors liable for those debts,” says Richard Edwards, founder and director of Whites Legal, a firm specialising in legal advice for hospitality businesses. “The creditor can normally go after the guarantor directly and immediately. I have seen a company set up with two sons and their mother as directors. The mum’s house secured the business and if they go bankrupt, the mum’s house is on the line.”
In addition to this, if a director of a company has been running the business with certain types of activity, such as trading while insolvent, then the Australian Securities and Investments Commission can ban them from running a company for a period of time.
In some cases, a company bankruptcy can lead to personal bankruptcy. “When you declare bankruptcy, a trustee is appointed,” says David Bergman, national manager of Insolvency & Trustee Services Australia at the Australian Financial Security Authority (AFSA). “All of your assets will vest in the trustee and you can no longer deal with them. You’re a declared bankrupt for a period of three years and there are a number of restrictions. If, during that three-year period, you continue to carry on a business, you have to disclose to anyone with whom you are dealing that you’re an undischarged bankrupt.”
If your business has gone bankrupt, the three-year minimum period before you can start again can seem like an eternity. However, this is an opportunity to gain those skills that may have been lacking the first time around.
Ken Burgin, founder of Profitable Hospitality, says, “A lot of people who get into this industry are not numbers people. They’re food people or ‘people people’ or relationship people without the skills to prepare a cashflow forecast or work out a budget. While their passion can be applauded, they need to gain business acumen so they won’t make the same mistakes twice.”
“When a business fails, forget about making excuses and instead analyse why things went wrong. Be open and honest with yourself and take the advice that you don’t really want to hear.”—Justin North, executive chef, Hotel Centennial, Sydney
Richard Edwards suggests: “During the time when you’re bankrupt, work out every mistake you’ve made. Go into somebody else’s business as a restaurant manager or as an employee. Build your skills so once you’re a discharged bankrupt, you have a plan in place for your next business.”
An enforced hiatus from business ownership gives time to reassess your priorities and get back to basics. Award-winning chef Justin North has experienced the highs and lows of the hospitality industry. Bécasse, his flagship restaurant in Sydney’s CBD, was awarded Best New Restaurant in 2002 and Best European Restaurant in Australia 2004 from the Savour Australia Restaurant & Catering HOSTPLUS Awards for Excellence. Then in 2012, Bécasse went into voluntary administration along with a catering business and a bakery owned by North.
“It felt like my whole world was collapsing,” says North. “When it all ended there was a sense of personal devastation. There was certainly no bad intention—it’s just the nature of the business—but it was a very difficult time.”
Since 2014, North has been executive chef at the Hotel Centennial in the Sydney suburb of Woollahra. The establishment had an extensive refurbishment in 2014 and has won over critics and public alike with its celebration of modern comfort food in a beautiful environment. While North has no plans at present to run another business, he does have some advice for those willing to try again.
“When a business fails, forget about making excuses and instead analyse why things went wrong,” he says. “Be open and honest with yourself and take the advice that you don’t really want to hear.”
While it’s possible for a chef to run the kitchen and be a company director, North believes that’s not the best business model for a successful restaurant. “It’s extremely difficult to run a kitchen and to run a business at the same time. They’re both full-time jobs with very different skill sets. You need to play to your strengths.”
Successful businesses are built on good reputations and going bankrupt can have an impact in that regard. “Not only are you looking at a minimum of three years of being bankrupt but your name is permanently listed on the National Personal Insolvency Index,” says Richard Edwards. “Then there are bad credit reports that hang around for four or more years. Your name is also going to pop up on Google whenever anyone does a search.”
When setting up a new business after bankruptcy, it can be worthwhile engaging a content consultant to utilise some targeted search engine optimisation. An online search should bring up reviews and stories of your new venture rather than negative reports of the business that went under.
At first glance, it may seem difficult to get credit with a supplier if you are associated with a bankrupt business. However, suppliers will generally only give terms of seven days or COD so there’s little difference between starting out or coming back after bankruptcy.
“Just remember,” says Ken Burgin, “if you miss a payment, you’ll find it extremely difficult to get credit again. I know some very canny business owners who pay their suppliers in cash on the day. It’s a great way to stay on top of things and keep a good relationship with suppliers.”
Coming back from bankruptcy means having a whole new respect for numbers. A business manager is an ideal solution or the owner must watch the bottom line like a hawk. BAS must be paid on time, suppliers kept happy and lease agreements thoroughly vetted prior to signing. Before starting any business, a complete and frank financial assessment should be made by a disinterested party. The excitement of running and owning a new restaurant or cafe mustn’t overwhelm the hard figures and profitability forecasts.
As Richard Edwards says, “The most important thing to remember is that if it doesn’t work on a spreadsheet, it doesn’t work in real life.”