The Mystery of The Blood Red Ledger

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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.

Louise's had also followed a top-down management model in which employees were expected to do as they were told. LeFranc encountered that culture as soon as he visited the restaurants. "I used to ask the managers, 'What do you think should be done?" he says. "And they looked at me with an expression like, 'What's the right answer?' And I would say, 'No, really, what do you think?' They just weren't used to being asked that question."

In 1997, Jon Chait, who was then managing director of Manpower, thought Louise's was promising enough to buy it from his brother and the venture-capital investors, who held a 20% stake. He knew, though, that he would need a professional to take over for his brother, whom he describes as a passionate entrepreneur who was bored by managerial details. (Bill Chait declined to comment for this story.) Using a headhunter, he found LeFranc.

But things would hardly go as Jon Chait had planned. After Louise's filed for Chapter 11, the bankruptcy judge threw out Jon's deal to buy the company for $4.5 million. Instead, because there were other people interested in buying the chain, he ordered an auction. Jon ended up paying $7 million for Louise's, which added yet one more financial burden. Under the terms of the sale, which was completed in January 1998, when Louise's exited bankruptcy, Jon put up $3.5 million in cash and gave the creditors a note for another $3.5 million to satisfy their debts. The note paid the creditors principal and interest of about $68,000 a month, which would come out of Louise's already stretched coffers.

The hunt
In his previous jobs, LeFranc -- an analytical man in any case -- had learned to rely on the grittiest of details. To run a successful restaurant, he believed, he needed to manage what to others might seem like minutiae: the frequency of supply deliveries, the way food is stored in the walk-in refrigerators, the unit costs of premade tomato sauce, seasonal-staffing schedules, targeted marketing promotions, guest counts, average check sizes, and the margins on a plate of food. But the former owners had measured few if any of those details. In the chaotic months after the bankruptcy filing, LeFranc had hardly any of the information he needed. He was flying blind.

To add to his troubles, accounts payable was in shambles, and his first chief financial officer quit shortly after the filing. In March 1998, LeFranc lured James McGehee, a controller he had worked with at Una Mas, to come aboard. On McGehee's first day as Louise's controller, a second CFO, on the job for just two weeks, walked into McGehee's office and wished him luck. He, too, was leaving.

McGehee, who suddenly became CFO, put a temp to work sorting out stacks of invoices left in the wake of the bankruptcy filing. "In the second week I was there, I caught a duplicate payment of $110,000," he says. He hired everyone he could find, including LeFranc's two kids, to help input the invoices. It took him three months to put together an earnings statement. Louise's was losing $157,000 every 28 days. But where were those losses coming from?

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