The Mystery of The Blood Red Ledger

Something was poisoning the profits at Louise's Trattoria, and the new CEO didn't have long to find out what

In August 1997, after a 22-year career in the restaurant industry, Fred LeFranc finally got the call. An investor was buying Louise's Trattoria, a $22-million Italian-dining chain with 15 restaurants in the Los Angeles area. The investor wanted LeFranc as his CEO.

Louise's, which dished up homemade pastas, pizzas, and entrÉes, had won a following in ritzy Santa Monica, Beverly Hills, Brentwood, and Pasadena. But popularity had not translated into profitability. That's why the prospective owner wanted LeFranc. LeFranc's job: to pump up the struggling restaurants and expand.

The career move seemed tailor-made for LeFranc, who had helped grow a few companies in the past. The first was El Torito Restaurants in southern California, where he had worked for 10 years. Later he had served as chief operating officer at Una Mas, based in Palo Alto. In the latter position, he had helped expand the Mexican-food chain from 8 restaurants to 25 and had merged it with the Pollo Rey chain, doubling the size of the business.

Restaurants were in LeFranc's blood. He had dropped out of his pre-med studies at Chicago's Northwestern University at the age of 19, breaking the heart of his mother, who had emigrated from Mexico and dreamed that her son would become a doctor. He began waiting tables at the Chicago Hilton, eventually working the legendary Pump Room, where Frank Sinatra would show up at 1 a.m. with his entourage in tow and keep the joint hopping until dawn. LeFranc never looked back.

At age 41, LeFranc decided to take the top suite at Louise's, eager to grow a new company and try out in a small arena a raft of management theories he'd been testing for years. He got a 5% stake in the company, so he could eventually cash out in a sale or a merger. Plus, he'd be back in southern California, close to where his two teenage children were living.

On September 1, 1997, he moved into the main offices of Louise's, which were located far from the restaurants themselves, in a patch of cheap office space near an oil refinery in Torrance. Even before he could tour all the restaurants and shake the hands of his managers, the California State Board of Equalization froze the company's bank accounts, seeking $225,000 -- about three months' worth of overdue sales tax. Unable to write checks to suppliers on the frozen accounts, Louise's filed for Chapter 11 bankruptcy protection. It was LeFranc's ninth day on the job.

Unable to write checks to suppliers on the frozen accounts, Louise's filed for Chapter 11 bankruptcy protection. It was LeFranc's ninth day on the job.

He was shocked. "What did I get myself into? This was not part of the deal," LeFranc recalls thinking. Quickly, he called a meeting with his employees and reassured them that Louise's was still afloat. But over the next harrowing months, he delivered another message: In a company blindsided by surprises, Louise's would now follow a policy of truth telling. "And the truth is, we're fucking bankrupt," he told the workers. (When LeFranc is driving home a point, he gesticulates and you can hear the remnant of a Chicago accent.) Honesty would be a two-way street, he said. He would require the managers to be up-front about their operations, just as he would be about the company's finances. The approach was especially crucial at that point, because it was the only way to identify problems, correct them, and surmount the crisis, he said.

Then he hit the road to get credit terms restored with his suppliers.

LeFranc never says he felt betrayed or misled about the state of affairs he walked into. But he admits that like the rest of the employees, he didn't realize the depth of the chain's problems. He didn't know that the former managers had been using tax receipts to cover expenses. And there was a lot more he wouldn't learn -- until much later.

In the $376-billion restaurant industry, pretax income averages only 6%, according to the National Restaurant Association, the industry's main trade group. With unforgiving margins like those, making a go of any restaurant is a herculean effort. And the odds of turning around a bankrupt restaurant are slim. Against that backdrop, LeFranc was in for a fight against both time and hungry competitors. He had to cut losses and generate cash, let deadweight employees go and boost the morale of the people he would keep, and, finally, figure out how to lure customers back to the establishment. He would call upon two skills he'd learned over the years but had never tested in such a harsh environment: using technology to manage a business in maniacal detail and empowering workers to make decisions on their own. Although LeFranc had formidable experience, he had never had to tackle so many crises simultaneously -- and against such odds.

Louise's was founded in 1978 and grown by restaurateur Bill Chait, who acquired it seven years later. Chait, according to several people, had an almost instinctive grasp of the business, anticipating and riding the wave of the Italian-food craze that began in the late 1980s. Chait's brother, Jon, financed the chain's second restaurant; over the years, Bill Chait sought and received $14 million in venture capital and loans from Bank of America and Bankers Trust and used the money to expand the chain. But like many other restaurant organizations, Louise's found that undisciplined growth would be its undoing. "They started building restaurants and spending money faster than it was coming in," recalls Jon Chait.

Before LeFranc came aboard, Louise's had already closed four restaurants on the East Coast. LeFranc would eventually reduce the total number of restaurants to 13. But despite the chain's obvious problems, it already had its fans. "They had real strong attributes, like high-quality takeout years before it was the norm," says Jim Parish, a Dallas restaurant-investment consultant who advised one of Louise's investors in 1997, when the troubles surfaced. But Parish found the management team lacking. "You need to be aware of costs and build it into your daily discipline. None of that existed," he says.