Restaurant Industry Faces a Dramatic Decline Due to COVID – 19

With forced closures due to COVID – 19, the restaurant industry faces a dramatic decline in revenues and an uncertain future. Restaurants and other small businesses must act now to establish a potential business interruption claim.

The National Restaurant Association said economic impacts from COVID-19 on restaurants, America’s second-largest private-sector employer, could reach at least $225 billion during the next three months, with 5 million to 7 million jobs lost. As a result, restaurants are revising their business model to provide meals in different ways such as takeout, delivery, and safety-enhanced dine-in, but are facing economic hurdles that will lead many restaurants to shut down operations, lay off workers, and end service in their communities.

Restaurants and other small business owners should seek advice from legal counsel as to whether their insurance policy covers such events. Most commercial property policies provide coverage for lost business income when there is “direct physical damage” covered by a “covered cause of loss” at the location. In virtually all cases, and especially those involving policies that do not contain the bacterium and virus exclusion, the court’s interpretation of what constitutes “direct physical damage” will be the determining factor regarding coverage.

If coverage applies, business owners must think in terms of what net profit they would have earned “but for” the triggering event (in this case COVID – 19). The ability to support estimated net lost profits is contingent upon historical operations of the business as well as other financial indicators such as pre-event business projections and/or forecasts. Forensic accountants are experienced at preparing business interruption claims and can assist counsel in negotiating with insurance companies. Additionally, as experts, we can assist a business owner gather the relevant financial and non-financial documents they will need to file a business interruption claim.

Specifically, business owners should compile or follow up on the following information:

• Consult with counsel to review their insurance policy for any potential coverage.
• Accumulate records related to COVID -19 impacts such as the timing and number of customer and/or event cancellations and additional costs incurred due to COVID 19 (i.e., hiring additional delivery drivers, getting additional loans, etc.).
• Gather various financial documentation, inclusive of, but not limited to:

1. Monthly profit & loss (“P&L”) statements for at least one year prior to the start of the COVID – 19 onset as well as continuing monthly P&L statements through the date the business recovers;
2. Projections and/or budgets prepared prior to and after the onset of COVID – 19;
3. Tax returns, financial statements, and general ledgers for, at a minimum, the past three years.

It remains to be seen how the restaurant industry and other small businesses will recover from the COVID-19 pandemic. For the restaurant industry — particularly small, non-chain restaurants — to truly survive the crisis, something drastic will need to be done. Government-backed bailout, in the form of rent abatements, tax deferrals, disaster relief loans, and other kinds of relief, still remains uncertain. It’s hard to say what the restaurant industry will look like when we finally emerge from our houses in the coming weeks and months and, as such, business owners should be consulting with attorneys and accountants now so they can understand what information they need to file a business interruption claim. Please do not hesitate to reach out to Sareena Sawhney, a Principal in Withum’s Forensic and Valuation Services Group – https://www.withum.com/our-people/sareena-sawhney/ or contact her directly at (646) 829 – 1440 with any questions.