Service -- Restaurant Chain
Restoration/restructuring of a Restaurant Chain
We were contacted by a private equity firm that held a non-control investment in a restaurant chain with thirty locations in five major American cities. The investment had not produced profitable growth as promised. Losses were mounting and the chain's bank threatened foreclosure. The firm was unsure of recouping its investment.
A detailed analysis revealed that many locations generated significant cash flow, but nearly half were cash flow negative. (Prior to our involvement, the board had never reviewed store-level performance.) The company quickly closed non-performing locations and exited markets where cash flow was negative. Expense and cash controls were implemented. These moves brought the business to positive cash flow at the store level.
G & a expenses were dramatically reduced by relocating the corporate offices, staff cuts, and other expense savings. The final step in the turnaround plan was the restructuring of the balance sheet. The plan called for individuals with $2.5 million in notes to convert them to preferred stock. The private equity firm then invested an additional $1 million to dilute all other shareholders to a 5% position, and took control of the newly stable and debt-free business.
Our turnaround plan helped convince the bank that it was in their best interest to enter into a forbearance agreement rather than force a bankruptcy. Over a year, the bank's exposure was reduced from $5 million to $200,000, primarily via real estate sales. The company's balance sheet was completely restructured with debt virtually eliminated, giving the private equity firm control of the business. The viability and scalability of the concept was proven. Positive cash flow was generated at the store level and the company was poised for additional investment and growth.