Strategies for Overcoming Financial Distress in Hospitality

Financial distress can pose significant challenges for property owners in the hospitality and lodging industry. Understanding the intricacies of these challenges and exploring strategic options is crucial for navigating through turbulent times.

The journey to addressing financial distress begins with a thorough self-assessment by the ownership group. This involves critically evaluating the current situation, including trailing and forward-looking metrics. Understanding the economic conditions and market changes that have contributed to the distress is essential. Recognizing the distinction between factors within the c ownership group’s control and external factors, such as a pandemic, is the first step in formulating a strategic response.

No property becomes financially distressed overnight; rather, it is often a death by a thousand cuts. The realization that the situation has reached crisis levels is often slow to be acknowledged. However, once a property has become financially distressed, and the ownership reaches the point where they can no longer ignore the elephant in the room, the group faces numerous decision points.

One of the first pieces of data to be considered is the property’s value. There are two components to this analysis: first, what equity exists in the property, and can it be accessed? Second, assessing whether the current use of the property is maximizing its value potential or if there are alternative uses for some or all of the property that could drive additional value. This evaluation should include a hard look at the property’s current and potential future uses and value.

Stakeholder considerations are another critical aspect. Ownership groups must decide whether to keep the property and, if so, what is needed to do so. This involves considering the interests of various stakeholders, including lenders, franchisors, investors, and employees. The decision to keep or sell the property is not easy and requires careful deliberation.

Capital expenditures (CapEx) are often a significant factor in these decisions. Evaluating the necessary upgrades, the associated costs, and understanding the funding sources for these expenditures is essential for determining the property’s viability going forward. Maintaining a good relationship with lenders is also paramount. Lenders’ willingness to work with the ownership group can significantly impact the available options. Understanding the lender’s perspective and negotiating terms that are mutually beneficial is a key part of the process.

Building the right team is another critical step. Assembling a knowledgeable team that includes experts in finance, operations, and other relevant disciplines is essential for developing a comprehensive workout or sale methodology. This team will play a crucial role in navigating the complexities of financial distress. One of the questions that needs to be asked is whether current management is part of the problem.

Addressing immediate needs is a priority when dealing with financial distress. One of the first steps is creating a 13-week cash flow plan that outlines anticipated revenues and expenses over a calendar quarter and serves as a tool for managing immediate financial needs. It provides a clear picture of the cash flow situation and helps in making informed decisions.

Long-term planning is equally important. This involves considering CapEx, lender relationships, and potential sources of fresh capital. Developing a clear story to communicate with lenders and franchisors is crucial. This story should include the cash flow plan and a vision for the future, demonstrating the ownership group’s commitment to turning the situation around.

Despite best efforts, recovery may not always be possible. In such cases, understanding the available options is essential. Lenders can take several potential actions, including appointing a receiver, foreclosure, or appointing a Chief Restructuring Officer. These actions can have significant implications for the ownership group and should be anticipated and planned for.

Operators also have options, including selling the property, filing for bankruptcy, or pursuing an assignment for the benefit of creditors. Each of these options has its own set of considerations and potential outcomes. Selling the property involves evaluating whether the sale will generate enough value to satisfy creditors. While often seen as a last resort, bankruptcy can provide a structured process for addressing financial distress. An assignment for the benefit of creditors is another route that involves liquidating assets to satisfy creditor claims.

Bankruptcy can be a viable tool for addressing financial distress, but it comes with challenges. There are two primary types of bankruptcy relevant to the hospitality industry: Chapter 11 (reorganization) and Chapter 7 (liquidation). Chapter 11 involves restructuring obligations and emerging from bankruptcy with a viable business. Chapter 7, on the other hand, consists of liquidating assets to satisfy creditor claims.

The bankruptcy process is complex and requires the involvement of knowledgeable professionals. A team that includes bankruptcy counsel and financial advisors with experience with the process is essential. This team can help navigate the intricacies of bankruptcy and develop a plan that maximizes the chances of a successful outcome.

Navigating financial distress in the hospitality industry requires a strategic approach and a thorough understanding of the available options. From self-assessment and decision-making to immediate needs and long-term planning, each step is crucial for addressing the challenges of financial distress. Involving professionals early in the process and developing a clear plan can significantly affect the outcome.

These insights provide a valuable roadmap for or ownership groups facing financial distress. By understanding the key considerations and exploring the available options, ownership groups can make informed decisions and navigate through challenging times with greater confidence.