adminTodd Graves’ high-risk funding strategy for Raising Cane’s Chicken Fingers was a bold gamble that almost cost him his dream.
Today, the co-CEO and founder of Raising Cane’s is worth an estimated $9.5 billion, according to Forbes, thanks to his over 90% ownership stake in the company. But getting there was no easy feat. He had to work 90-hour weeks in an oil refinery and fish for salmon in Alaska just to raise enough capital to open the restaurant’s first location.
When he was growing the chain, Graves said he took out loans with private investors at a 15% interest rate. He then took the borrowed cash to community banks, which treated the debt as equity, allowing him to secure even larger loans, he told the “How I Built This” podcast in 2022.
It was a risky decision that nearly ended up costing him the business. When Hurricane Katrina shut down 21 of 28 of his stores in the Baton Rouge area in 2005, it temporarily shut off the flow of revenue Graves needed to avoid defaulting.
“I tell entrepreneurs, ‘Don’t do that,’ because my dream almost just went away,” Graves told the “Trading Secrets” podcast in May. “It was stupid.”
The business “luckily” survived, Graves said, because of its ability to reopen relatively quickly after the hurricane. The experience taught him to better balance risk. Today, Graves makes sure his company has less than three dollars of debt for every dollar it owns, he told “Trading Secrets.”
‘Many business owners who hold that kind of debt may not make it’
He’s fortunate taking on such a heavy debt load initially didn’t hurt Raising Cane’s in the long run, according to Bryan Bean, executive vice president of corporate banking at Pinnacle Financial Partners. “Many business owners who hold that kind of debt may not make it to the other side,” Bean tells CNBC Make It.
Cash flow leverage indicates how much debt a company has compared to its EBITDA, or how much money a business makes from its operations before accounting for additional costs like interest and taxes, says Bean.
Keeping that ratio below three times, which is what Graves does now, is the industry standard, according to Bean. For smaller companies, Bean says that a leverage ratio of one or two times may even be more appropriate. Anything above a leverage ratio of three is considered extremely risky, Bean says.
Individuals also need to be cautious: Personal finance experts recommend keeping your own personal debt-to-income ratio lower than 36%.
Taking out loans can be beneficial for growing a company. Former Vice chairman of Berkshire Hathaway and Warren Buffett’s business partner Charlie Munger, who died last year, once said Berkshire Hathaway would be worth “twice what it is now” if it had used leverage.
And raising money through debt, rather than by taking on too many additional investors, is why Graves still owns nearly all of Raising Cane’s today.
The risk lies in a company’s ability to get out of the red, Bean says. Unexpected events like Hurricane Katrina can pose a significant threat to businesses carrying a lot of debt. Recovering and transforming Raising Cane’s into a business that generated $3.7 billion in net sales last year, according to the company, is no small achievement.
“It’s a really impressive thing that he’s done,” Bean says of Graves. “He chose a capital structure that, in his own words, was riskier because it was loaded with a lot of debt, and not only a lot of debt, but a lot of expensive debt — so I think that makes the degree of difficulty even harder because he had probably less room for error.”
In the end, Graves’ risky move didn’t sink his company, and he’s adamant he learned his lesson after a close call that he now blames on youth and inexperience: “I was in my 20s and I was stupid,” he said.
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