News Release
This article appeared in the February 2005 issue of
Chain Leader Magazine
CREDIT COUNSELING
David L. Epstein, Principal
J.H. Chapman Group, L.L.C.
David L. Epstein, a principal at J.H. Chapman Group,
may be best known for his annual analysis of restaurant transactions.
But the investment banker is also an industry player. Last year,
for example, his Rosemont, Ill.-based firm participated in the sale
of three bankrupt chains. Chain Leader grilled Epstein, who once
managed a full-service restaurant, about managing investment capital.
Q. Did restaurant bankruptcies accelerate or decelerate
in 2004?
A. By my count, we saw only five last year, and that’s lower
than in the past. There’s a reason for that. There are not
too many lenders allowing over-leverage to take place. So we have
fewer restaurant companies in trouble today than in the past –
and a slowing down of bankruptcy filings.
Q. Why do so many bankrupt chains end up being sold instead
of reorganized?
A. Actually, more than 80 percent of restaurant chains in bankruptcy
are sold. That’s a very high percentage. Companies in other
industries are typically reorganized. In a restaurant bankruptcy,
however, it makes sense to try to sell the assets of the brand in
order to realize value to the shareholders.
Q. Why do private companies go bankrupt more often than
public companies?
A. First, public companies don’t have the same leverage issues.
They can weather declines in same-store sales. If that happens in
a highly leveraged private company, it’s trouble. The biggest
reasons restaurant companies fail is that management leverages the
company too much or goes into loser sites or doesn’t hire
top-quality staff. What all three reasons have in common is management
itself.
Q. Are you saying management should avoid borrowing?
A. Restaurant companies do need financing to grow. If they were
to use cash flow, they would not grow that quickly. They also need
money to make acquisitions. What that means is managements must
learn to operate differently when they are suddenly put into a high-debt
situation. The money supply has put companies in perilous situations
if same-store sales decline or they open a couple of bad locations.
Some managers feel the money needs to be put back into units. That’s
what a lot of managers who have not been in (high-debt) situations
would do. What they should do is reduce the debt. Because as soon
as debt reduces, value increases. In short, you need to have fast
growth, yet you always need to use cash flow to retire debt.
Q. Lender attitude toward chains is changing, isn’t
it?
A. There has been a break, with more participants extending credit
– meaning they are able to advance more dollars. That indicates
we will see higher values. Keep in mind the money supply has a profound
impact on value. If lenders are willing to extend more credit, for
example, the values of chains increase. If there is a credit constriction,
values decrease.
Q. Are equity funds also more eager to enter the restaurant
space?
A. They are buying for price and for opportunity. Equity players
have more money today then they ever had, and they are looking at
the restaurant industry because it has a track record of success.
