Franchising | October 2010 | By Nick DiUlio

Back from Bankruptcy

As a chain goes through bankruptcy, it’s the CEO who is tasked with stabilizing and growing the brand.

In order to assure the brand gets back on the right path, a chief executive must
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There is plenty of advice a brand should heed when moving through the bankruptcy process. Bringing on outside advisers, staying honest with your lenders and suppliers, and timing the process appropriately are all ways to make sure the bankruptcy business goes as smooth as possible. But the role of the CEO through bankruptcy is ultimately the one that can best determine how strong the brand can grow after the process. 

“First and foremost, the CEO’s role in a bankruptcy is to protect the core of his or her business,” says Mike Best, chief operating officer of the U.S. branch of the Canadian-based Boston Pizza. “The CEO may not be 100 percent responsible for salvaging the brand, but he’s at least 90 percent of the equation.”

Best, who was brought on as the CEO of a Dallas-based retail chain several years ago as it worked its way out of bankruptcy, says that everyone inside and outside the company will be looking to the CEO for guidance, reassurance, and strength.

“Outside of the bankruptcy judge,” Best says, “the CEO is the most important person in the process.”

Be the Custodian of the Brand

Even in the best of times, customer relations and public perception are key ingredients in the success of a quick-service brand. When it comes to filing for—and, hopefully, emerging from—bankruptcy, that perception is going to take on exponentially greater importance, and the CEO must take an active role in managing it.

“The implication of a company in bankruptcy is that the entire enterprise is in the toilet, and when your job is selling food, that is not a very positive image to show your customer base,” says Jim McTevia of McTevia & Associates, a consulting firm that specializes in restructuring troubled brands. “It’s the fulltime job of the CEO to guide the company and the troops through that process.”

The good news is the CEO doesn’t have to shoulder this responsibility alone. Best says that even smaller-market brands should have a concentrated public relations plan to battle negative press and perceptions. He also says that putting a positive spin on a bankruptcy is not as difficult as it once was.

“From a public relations standpoint and a creditor standpoint, bankruptcy is a lot different than it used to be,” Best says. “Ten years ago people thought you were done. Now people see it as more or less expected in this industry, so you must work with your media people to try and put as positive a spin on this as you can.”

In addition to managing perception of the brand, a CEO’s custodial duties in a bankruptcy also involve confronting the operational problems that got the company there in the first place—and fixing them.

“Some CEOs still have this idea that Chapter 11 is going to solve operational and financial difficulties,” Best says. “But bankruptcy itself does not solve any business problems.”

Secure Your Relationships

With so many key players to consider in a restaurant operation, a quick-service CEO facing bankruptcy needs to make sure his relationships are not only secure, but that each individual has faith that the brand will emerge with success.

Gary Young has been general counsel to the New Jersey Restaurant Association since 1996. He’s seen a lot of chains come and go and says most CEOs don’t spend enough time securing these relationships at the outset of a bankruptcy.

“The CEO must not only be a creative thinker and figure out a way to turn the brand around, but he or she must also be a great persuader and be able to convince key stakeholders that the plan will work,” Young says. “That means convincing them that you have a solution to the problem.”

It also means that a CEO who doesn’t maintain these critical relationships may find his or her best people leaving for the competition, which is only going to make immerging from Chapter 11 that much more difficult.

As a CEO, you did have something to do with the company’s woes, so be humble.”

“Those key relationships are often the company’s greatest asset, and they aren’t on the balance sheet,” McTevia says. “If they aren’t comfortable that you have the ability to salvage the company and bring it out of bankruptcy, they will go to the competition, and losing key people during a Chapter 11 happens because no one kept up with those relationships.”

Don’t Slip Back into Old Habits

Isidore Kharasch is the president of Hospitality Works, an operational foodservice-consulting firm that specializes in troubled brands. He says that once a company has emerged from bankruptcy, the CEO should guard against making the same mistakes that got the brand in trouble.

“As I’ve seen people come out of Chapter 11, they sometimes go back to the same mistakes,” Kharasch says. “They let managers hire more people. They put the dollars back into too much labor. But CEOs need to hold the line, stay tough, put in the hours, and get sales over and above where they used to be. Then start hiring again.”

Moreover, says Garland Pollard, an independent brand consultant, CEOs should avoid the temptation to throw new gimmicks into the brand in an effort to start anew after bankruptcy.

“Do not try for new menu gimmicks or other diversions. Instead, you have to figure out how the successful old formula went awry,” Pollard says. “The CEO will need to be honest. Why did it happen, and what is the core idea of the brand that should survive?”

Stay Humble

Chapter 11 could just as easily be called Humility 101, as it’s nearly impossible for a CEO to emerge from bankruptcy without a newfound sense of his own limitations. But that humility serves a purpose greater than its moral veneer. It may result in a better business model.

“CEOs are used to getting their own way, but in bankruptcy, it is clearly different,” Best says. “You have to bite your pride a little bit. You did have something to do with the company’s woes, so be humble. Take in feedback from different constituents and put your ego aside a little bit.”