When banks sense their loans to restaurants are starting to spoil, they call Isidore Kharasch.
As the owner of Chicago-based Hospitality Works, Mr. Kharasch rescues restaurants that are having difficulty repaying their loans.
Dubbed "the restaurant doctor" by his clients, Mr. Kharasch helps keep restaurants out of bankruptcy by helping them develop menus, staff, and facilities.
"Planning for failure is a big part of our industry," Mr. Kharasch said. "If a restaurant or a hotel or any business is going to fail, they usually do in six months to a year after they open."
About 27% of all restaurants fail within the first year of business, and 70% go under within five years, according to Mr. Kharasch.
Still, banks keep serving up loans to the restaurant industry. Indeed, Harris Bank, LaSalle Bank, Compass Bancshares, and NBC Bank of Tuscaloosa, Ala., have all called on Mr. Kharasch to rescue restaurant loans ranging from $1 million to $1.8 million.
"I'm surprised not at the up-front equity that banks require of their customers but that they don't force those customers to do more due diligence for their projects," Mr. Kharasch said. "The bank looks at it in very strict numbers, and it's the things that aren't in the numbers that hurt the loan down the road."
Most banks require that restaurateurs put equity into an escrow account that is equivalent to 10% of the project cost, Mr. Kharasch said.
Mr. Kharasch and his 15-member staff have represented more than 220 restaurants in the last 10 years and helped 92% of them out of bankruptcy. Almost all of those situations involved rescuing a loan.
Among his clients have been Mike Ditka, Michael Jordan, Amoco Corp., Harrah's Casinos, Grand Casinos, and Black-Eyed Pea.
He added that his company's first goal is to turn a restaurant around. But if he cannot, he tries to keep it running until it's close to breaking even so the owners and their bank can sell it as a going business.
That way, the bank may get back 50 to 70 cents on the dollar. "Often, someone else can come in and make that location successful," he said.
If a bank closes a restaurant, Mr. Kharasch says, it can only get back 10 cents on the dollar.
Observers say that Mr. Kharasch has found fertile soil to till.
Michael Rowen, a restaurant analyst at Moody's Investors Service, noted that the distressed conditions of larger restaurant companies illustrate broader problems in the industry.
"What's hot today could turn cold tomorrow," Mr. Rowen said. "The competitive environment for restaurants remains challenging going forward, and in general, with capacity coming into it at a faster rate than overall growth, many operators are seeing negative same-store sales."
Flagstar Restaurants, for example, the Kohlberg, Kravis & Roberts- sponsored owner of Hardee's Restaurants and Denny's family restaurants, is currently in bankruptcy proceedings. Meanwhile, American Restaurants is selling its Black Angus franchise.
Richard Conti, a partner in the hospitality group of Coopers & Lybrand LLP, said "restaurateurs tend to put all of their funds into operating the restaurants but not enough working capital to make payroll.
"Lack of working capital, lack of expertise, and misbudgeting tend to be the major causes of bank loan default," he said.