1. Debt Management The 3 Rs to Surviving the Recession Wednesday, Dec. 9, 2009 at 2 p.m. ESTModerator: David Koenig, director, tax & profitability, National Restaurant Association Panelists: Christine Janklow, President SettleSource, Inc.Sarah Lockyer Financial Editor Nations Restaurant News

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Introduction Todays turbulent global economy has reduced sustainability throughout the business community.With large corporations and financial institutions receiving bailouts and even filing for bankruptcy protection, business confidence may be at its lowest point in decades.Effects are widespread and have lead to significant erosion inconsumer spending, thus leaving thousands of small businessesin peril.Is there any light at the end of this tunnel?Yes! Proactive positioning can make all the difference between survival and demise. An old adage says it best, No one plans to fail, we just fail to plan. 4. Three Rs to Surviving theResourcefulness: Necessary for businesses at Recessionany stage. The ability to take what is In an effort to illuminate the available and make it better. reasons many businesses of all sizes are struggling weResilience: What makes difficulties survivable. will cover both the causesMuch of what makes a business resilient is it and effects of what canculture, attitude and preparedness for the disable any business fromunplanned. thriving. No matter the cause, at the core of turning things Recovery: The will and ability to find a way around, there are threethrough difficult times and keep focused on common strengths referredthe end goal of repairing and growing to here as the 3 Rs thatstronger than before. are key to surviving. These are part of entrepreneurial DNA, so use them and maximize them to elevate your situation 5. Five Reasons Businesses Fail 1.Loss of Revenue- Income is the reason most are in business, lost income and declining customer base may be due to circumstances beyond your control or other attributable factors, such as: The current economic climate. Your product pricing vs. competitive pricing Reduced traffic to your location(s) Declined customer spending (average tickets) 2.Poor Business Models While losing revenue is problematic, it is most often because the original or existing business model is no longer viable. Business planning (and measuring) is essential to insure that opportunity and competitiveness are optimized. A business model must also be executed properly for the entity to realize revenue. 6. 3. Management/Operational Issues As it goes, entrepreneurs bynature may not possess (or employ) the proper balance betweenownership and management skills to balance internal and externaldynamics that affect overall operations. If internal management is insufficient, the effects are usually strongly andadversely reflected upon the bottom line. 4. Lack of Capital To start and sustain, all businesses must havesufficient working capital. As is often recommended in individual financial planning, a business shouldstrive to maintain a balance sheet that can support 3-6 months of payrolland operational expenses. Doing so is paramount in insuring a cushion will exist to manage unforeseenloss or crisis. 7. 5. Credit/Debt Issues Many businesses have relied on access toeasy credit in the forms of lines of credit, credit cards, loans andhome equity lines of credit, to finance their businesses. Small businesses are now struggling as a result of tighter lending, high rate credit cards, reduced lines and maturing loans, leaving many heavily burdened with mounting and high cost debt. If there is a true culprit of financial distress it is DEBT. When there are payments due monthly even the smallest slump in the economy can signal the end of a business.I will discuss some facts about credit/debt and alternatives toprovide relief and substantially reduce debt exposure duringour discussion today. 8. Small Business and DebtDebtDistressedorReasonsforSmallBusinessClosures UnderperformingBusiness DebtStatistics *20% estimated by Federal Reserve statistics for total credit card debt 2009 **Small Business Administration 2006 Closure stats Source: BusinessWeek-Data Buccino & Associates Independent study US Bankruptcy Statistics (+ increases from 2007) 9. Debt: How much is too much for my business? Any debt can be too much for a business not generating multiple times the principal and interest payments in added net profits attributable to the use of borrowed funds.This table illustrates acceptable levels of debt to capital for selected industries. Source: Standard & Poors 10. Small Business FinancingType PercentageCredit Cards59% According to the National Small Earnings of Business51% Business Administration 2009Bank Loan 45% Small Business Credit CardVendor Credit 30%Survey; This table describesPrivate Loan (Friends or Family)19%the most common methods ofUsed no financing 19%financing used (within the last Leasing 7%12 months) to meet capitalSmall Business Administration 5% (SBA) loan needs among its respondents.Factoring (Pledging Accounts1% Receivable) Private Placement of Debt 1%Private Placement of Stock1%Public Issuance of stock 0.5% Source: NSBA 2009 Small Business Credit Card Survey 11. Capital Constraints Credit cards are the leading source of small business financing. Credit cards facilitate easy access to capital, especially in the early years of a business. Small business owners have the least access to capital and are often left no alternative but to fund by way of revolving credit. This chart illustrates how capital constraints can affect businesses. Source: NSBA 2009 Small Business Credit Card Survey 12. Capital Trends for Hospitality Lending is still frozen for many: Look to regional banks, equity deals,equipment financing or landlord incentives for needed capital.National lenders and major banks are still saying noSeek debt-to-equity deals: There are investors on the sidelines thatare willing to partake in this.Granite City was the latest to do this successfully Don't forget about angel investors or stealth capital.Redstone American Grill is expanding via investors that agree to finance the building ofrestaurants and the operator agrees to manage locations for a fee Source: Sarah Lockyer, Finance Editor Nations Restaurant News 13. Capital Trends for Hospitality Cont.Continue to trim costs: With such reduced sales across the board, operations need toadjust to a new reality Close underperforming locations Renegotiate leasesTrim labor (but don't disrupt service)Review every P&L line item, work with suppliers to find new, lower-cost menu itemsUse technology to help drive efficiencies [California Pizza Kitchen, Ruby Tuesday, Wendy's have made greatstrides here.]Look for ways to provide Value -- a must have in today's market. While its a struggleto operate today, consumers are looking for value above all else. Operations that will succeed will offer lower prices, additional deals, added value to ameal, additional services, specials, etc. Join a purchasing co-operative.Smaller restaurants have been banding together in various regions to create more buying power amongsuppliers through purchasing co-operatives. Source: Sarah Lockyer, Finance Editor Nations Restaurant News 14. Survival Kits for todays tough economyThe Bellwether Food Group a firm primarily focused on strategy development and implementation with both Chain Restaurant Operators and Foodservice Manufacturers provides these key suggestions to retain and improve your customer base: Stay true to your brand and customers - Dont try to be all things to all people know who your loyal customers are and consistently exceed their wants and needs Innovation that supports your brand essence is critical to success - Products should reflect what your core consumers have loved about your menu - Your most loyal consumers want to experience new news Service the heck out of your loyal customers -The last thing you want to do is cut back on service - The most successful chains are improving their service rating to their core consumersSource: Bellwether Food Group 15. Survival Kits for todays tough economy- Cont. Bellwethers Jon Jameson says: These times demand developing new menu items and LTOs (Limited time offers) that your loyal consumers expect and want, at price points that reflect the current reality of the economy, while most importantly, reflecting the quality, integrity and flavors that your consumers demand from you. Although business has been difficult and revenues are down, the best brandsand restaurants have a laser focus on exceeding consumer expectations inquality of products, customer service and new innovation. Source: Bellwether Food Group 16. Survival Kits for todays tough economy- Cont. Analyze your P&L to save pennies without ever reducing the overall experience of your core consumersStay connected with your customer feedback consistently find out how you are delivering the guest experience - Simple customer comments cards or ask them to go to your website and fill our a score card on their experience - Every week, study the guests data and determine how you can make it better the next Tough economic times are the best times to renegotiate contracts, leases and purchasesSource: Bellwether Food Group 17. Debt Management In this section we will focus on two types of debt; Vendor and Supplier and (Business) Credit Cards We will discuss options to resolving Business Debt and provide specific examples of how various methods can provide relief. Source: www.settlesource.com 18. Five Options for Dealing with Debt 1.Pay as agreed in full, on-time and according to payment terms. 2.Re-negotiate new terms Lowering payment amountsLowering interest ratesExtending payment terms 3. Consolidate or transfer debt through low interest (secured) loan 4. Settle Debt a method of paying reduced settlements though negotiating balances owed 5. Bankruptcy a legal means of seeking partial or total debt forgiveness Source: www.settlesource.com 19. Coming to terms with Debt As in other areas of our lives and business, once we acknowledge a problem or issue and its causes, we are more empowered to deal proactively to find solutions. Depending on your attitudes toward money, business image and using credit for capital it is common to: 1.Feel embarrassed if your business suddenly Is unable to meet it monthly obligations with creditors Is subject to diminished credit by existing creditors Has been denied credit 2.Keep borrowing in better economies we were able to cover mistakes easily by accessing more debt to pay old obligations. This only increases the problem. 3.Do Nothing Because we can become easily overwhelmed by misinformation or our general outlook about a problem. We continue business as usual in hopes that thing get better. 4.Close or file for Bankruptcy We also can be propelled by fear into seeking protections that may far exceed the actual responses necessary to fix the situation.Source: www.settlesource.com 20. Coming to terms with Debt It is important to acknowledge -1. DEBT DOES NOT = DISASTER, DEMISE OR FAILURE!2. YOU ARE STILL SUCCESSFUL! You and your business were once and may still be worthy and successful enough toacquire the trade lines that have helped you grow and operate. Acknowledge how things have change and what will be needed to recover 3. BE WILLING TO TAKE ACTION! There are actions you can begin to take now to improve your finances andreduce your debt! 4. SEEK THE HELP OF A PROFESSIONAL! There are many financial advisors, turnaround experts, commercial debt counselorsand settlement companies that can take the burden off you by providing appropriateadvice and servicesSource: www.settlesource.com 21. Minimizing Debt ACME Prepared Foods Monthly Cash Flow Analysis CASE STUDY: Cash Receipts$90,000.00 ACME Prepared Foods* Monthly ExpensesPurchase for Resale (51.4%)$46,260 Situation: Experiencing a drop in annual Rent Building & Equipment $8,500 sales revenue of 31% from last year. Salaries $24,400Annual Revenue: $1,150,000Payroll Taxes $3,250 Accounting Legal$1,200Annual Expenses: $1,240,200 Advertising $1,600 Operating Office Supplies $5,367Net Revenue: ($90,200)Insurance $1,250 Utilities/Phone $2,726 This exercise will get into how to create Auto Expense $694 cash by creating a repayment plan onMiscellaneous$175 vendor/supplier expenses to help Other Loans/Credit Cards$1,429 improve cash flow. While beginning a reorganizing plan to reduce overall Bank Loans (Principal)$5,667 expenses. Bank Loans (Interest)$830TOTAL MONTHLY EXPENSE$103,348.00Table 1.1 CASH FLOW FOR MONTH($13,348.00) *Fictitious Example 22. Creating Cash without Borrowing In order for ACME to improve its cash flow, a vital step is to determine a repayment plan for creditors it is late in paying or not able to pay in full. This will alleviate pressures and risks due to aging or unpaid accounts. Most importantly it will provide operating cash and valuable time to work out a solution for the business, its top priority! ACME begins by selecting its largest open accounts for the month. It is going to defer payment on these accounts. The goal is to defer the maximum amount to allow a plenty of cushion and time to reorganize. Source: www.settlesource.com 23. Repayment Plan Table 1.2 on the next page, lists the total amount owed to each creditor, past due and days late.Step 1: ACME will divide the total amount owed by the maximum number of payments it calculates each supplier is willing to accept.Step 2: As ACME will notify each creditor in writing the reasons a payment plan is needed and specific steps it will take to fulfill it obligations with each creditor, they must: Be careful not to offer payment terms that can not be metEstablish relationships with back up suppliers prior to negotiating with selected creditors Keep a few suppliers paid on time to use as future credit references when needed Negotiate with suppliers for better pricing, asking for discounts for COD or cash payments 24. ACMEs Creditor Repayment Plan Table 1.2Creditor Total Owed Amount Past Due Days Past New Monthly No of PMTS Deferred PMTSDue PaymentCASH FLOWCREATED Creditor A $75,445.00$40,074.0090$6,287.0812$69,157.92Creditor B $16,500.00$12,750.00120 $1,375.0012$15,125.00Creditor C$7,325.50$5,420.00 30 $610.46 12 $6,715.04Creditor D$3,898.24$2,435.00 90 $433.13 9$3,405.11Creditor E$5,834.02$4,300.00 120$972.33 6$4,861.69Creditor F$1,524.69 $963.0030 $169.41 9$1,355.28TOTALS $110,527.45 $65,942.00$9,847.41$100,620.04Example: Creditor A is owed $75,445.00, Acme will offer repaymentin 12 equal installments of $6,287.08 each and include payment offirst installment along with its written notification to Creditor A. 25. BEGINNING CASH($13,348.00) Created Cash Flow CASH RECEIPTS $90,000.00TOTAL CASH AVAILABLE$76,652.00 By establishing a repayment plan with its vendors/suppliers ACME Monthly Expenses:has achieved a realistic expensePayments to Vendors (Repayment Plan) $9,847.41budget. Its beginning negative cash Purchases (Non-deferred) $2,456.00 flow ($13,348) has now been Rent Building & Equipment$8,500 nullified by the new repaymentSalaries$24,400 schedule. Payroll Taxes$3,250Accounting Legal $1,200 Instead of paying over $46,000 forAdvertising$1,600 current purchases plus trying toOperating Office Supplies$5,367 repay past due invoices, ACME Insurance$1,250 pays only $9,847.41! Utilities/Phone$2,726Auto Expense $694 This leave a substantial $20,608.59 Miscellaneous$175 cash flow without reducing anyOther Loans/Credit Cards $1,429 other expenses. Bank Loans (Principal) $5,667Bank Loans (Interest)$830 Most importantly the loss of TOTAL MONTHLY EXPENSE $69,391.41 $13,348.00 has been eliminated!! CASH FLOW FOR MONTH (Created cash without Borrowing)$20,608.59ENDING CASH$ 7,261.00 Table 1.3 26. Renegotiating Leases This is an example of a percentage based lease As most lease negotiations aredesigned to protect this company from large influenced by the economic climate, cash outlays during bad months and gives now might be optimal to achieving the landlord incentives during better months favorable concessions with landlords.Company A: Sales down 60% from $58,000 monthly Some tips to approaching a landlordto $23,000 in just six months. are: -Troubleshoot by carefully reviewing your lease contract before negotiatingIn this extremely distressed and volatile case, protecting cash flow may require Company A to -Be organized and have financial statements innegotiate and its tie rent to graduated sales handvolumes- Be open and honest Example A: Incentive only lease structure-Make sure they understand that it is impossible Current Base Rent: $1,800 for you to continue with present lease terms 2% of sales less than $19,999 -Let them know (if true) that closure or more drastic measure may be necessary without a 3% of sales of $20,000 - $39,999 new arrangement4% of sales of $40,000 - $59,999 (cap) -If possible provide landlord an incentive 27. Changes In Credit These are the most commonchanges experienced bybusiness card holders asmade by their credit cardcompanies since 2008These changes can wreak havoc for business card holders and prompt the need for changes that will accommodate repayment or prohibit non-payment. Source: NSBA 2009 Small Business Credit Card Survey 28. Dealing with Unsecured Credit Cards As over 59% of small businesses utilize credit cards for daily purchases. Of those,16% carry balances over $25,000 in credit card debt, and 21% with balancesbetween $10,000 and $25,000.More than 60% carry balances month to month. This poses danger when only making minimum payments, and subject to changes in terms as we will illustrate in a later slide.What can you do if this occurs? Begin my evaluating your new payment structure. If it is unaffordable than immediately contact your creditors:Ask them what can be done to lower interest rates Ask them if there are any balance liquidation programs available most majorlenders offer a hardship program subject to qualification If you are late on a loan or line of credit ask if there are any forbearance options todefer payments for a few months and add them onto the end term of the loanSource: NSBA 2009 Small Business Credit Card Survey 29. Commercial Debt Settlement Commercial debt settlement can be highly effective as a debt reduction tool. What is Commercial Debt Settlement? A legal and ethical method to negotiate reductions on balances owed on past due business debts. Usually best done by commercial debt arbitrators.How do I know it is a good option for my business? If you are currently unable to pay commercial credit cards as required, or have been unsuccessful gaining concessions, you can consider is the services offered by commercial debt settlement firms.How does it work? Rather than making monthly payments to your creditors, these programs negotiate lump sum settlements with your creditors, frequently reducing amounts owed by 50% to 60% of the principal balances. These programs usually take only 2-3 years to complete, so this is a good option for a business with a plan to recover to rid itself of debt in a relatively expeditious manner. In many cases the programs can also reduce your monthly payment toward your debt.Source: www.settlesource.com 30. How Commercial Debt Settlement Programs Can Help. A good debt settlement concern will involve an integrated approach of communication,education and financial management. It would also do the following:1. Carefully evaluate companies to make sure they qualify for program eligibility2. Assume all communications with creditors3. Ensure regular communication with clients to manage progress4. Make sure debts are negotiated in good faith, documented in writing then settled and paid aspromptly as possibleOther benefits of (utilizing) commercial debt arbitrators:They have experience, relationships and know when and how to settleThey are a NUETRAL and OBJECTIVE third party making the tough decisions toward best outcomeThey negotiate dramatic reductions on past due commercial debtsThey preserve vital cash flow which keeps businesses solventThey save owners valuable time and stress dealing with creditorsThey enable owners to focus on their businessSource: www.settlesource.com 31. Commercial Debt Settlement VS. Debt Servicing* A one year cost/savings comparison based on $120,000 Business Credit Card debt owed.Debt Servicing (Minimum Monthly Payment Schedule) Monthly PaymentsAnnual BalanceCash Flow Loss- Pay Down $3,600 $9,540($33,660)Annual CostsDebt Remaining Interest Accrued$43,200 $110,460 $22,092Debt Settlement (Minimum Monthly Payment Schedule) Monthly PaymentsAnnual DebtCash Flow Gain + Settled $2,160$40,000$17,280Annual CostsDebt Remaining Interest Accrued$25,920$80,000 $16,640After 1 year of Debt Servicing business now owes $132,552 After 1 year of Commercial Debt Settlement business now owes $96,640 Source: SettleSource, Inc. *Costs and estimates are based on average client debt loads and minimum monthly deposit requirements. Case references unsecured and interest bearing bank debts averaging annual decreases/increases at APR of approximately 20%+-. Savings and costs are based on a 50% savings. Results, actual savings and timeframes may vary. 32. Getting started on a Step 1. Begin by evaluating your financial recovery plan stability. Ask if any of the 5 reasons for failure apply We have provided someStep 2. Evaluate your P&L to determine if current and relevantany of the methods provided would help information regarding avail time or cash to help the business pitfalls and solutions toStep 3. Evaluate your day to day operations, businesses facing seek input and support from your increased financial employees on ways and plans to pressures.improve. This affects them too, so make sure they support your efforts and aid in If you are serious aboutrecovery gaining ground for Step 4. Begin to take steps determined to recovery, then we suggest negotiate for cash flow improvements you begin with these firstand gain favorable terms with creditors, few steps.vendors/suppliers, landlords, etc.Step 5. Stay positive! You are now on your way to financial recovery, manage it, Source: www.settlesource.com work it and remember to maximize the 3 Rs!! 33. Contact us If you have additional questions or wish to learn more about how we can help you construct a plan to help your business please contact:For help with Commercial Debt Settlement: Christine Janklow, President SettleSource P: 888.676.5606 x 101 Email chris@settlesource.com www.settlesource.comFor other articles and resources about financial recovery in hospitality: Sarah Lockyer, Finance Editor Nations Restaurant News Email: slockyer@nrn.com www.nrn.comFor help with strategic development and implementation: Jon Jameson, Founding Partner Bellwether Food Group, Inc. P: 843.422.4285 Email: info@bellwetherfoodgroup.com www.bellwetherfoodgroup.com 34. Question & AnswerPlease type your questions in the Q&A area in the lower right corner 35. Thank you for your continued support ofthe National Restaurant Association.View this and other recorded webinars on the web at www.restaurant.org/webinars