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Popular restaurant files Chapter 11 after rapid expansion

The business world is full of adages that encourage risk-taking (“nothing ventured, nothing gained”) and seizing opportunity (“strike while the iron is hot”). But this advice, while well-intentioned, needs to be tempered by appropriate caution. Even when a business is a booming success and continued growth seems inevitable, fortunes can change quickly.

Therefore, it is critical to balance current financial stability and investment in growth. The recent Chapter 11 filing of a popular Sushi restaurant is a good example of what can go wrong when ambition outpaces financial realities.

In late April, Kona Grill announced it would be filing for Chapter 11 bankruptcy protection. The popular chain, which started in Scottsdale, Arizona, grew to include 46 restaurants operating in about 23 states (though none currently in California).

After years of steady growth and success, Kona Grill was operating 23 restaurants in 2013. Over the next four years, the company doubled its number of locations, opening another 23 restaurants at a cost of approximately $4 million each. Even during the building boom, there were signs of trouble. Sales began declining in 2015, just as the company was pouring a lot of capital into expansion.

As a way to combat declining revenue and cut costs, Kona Grill reduced management staffing levels, cut training programs and largely stopped innovating culinarily. Unfortunately, these moves were detrimental to the customer experience, which further drove down sales.

Although the chain is filing for Chapter 11, it seems clear that the company plans to do whatever it takes to become profitable again and to stay alive in a competitive market. Kona Grill closed 15 locations (in addition to others that had previously closed) and is down to just 27 stores. It is now actively trying to find a buyer.

Certain CEOs might have handled growth differently based on internal company data and projections. But from the outside, most of us might conclude that Kona Grill’s heavy investment in growth seemed like a reasonable response to years of success. Sometimes, however, the fortunes of the business world can be unpredictable.

If you are a struggling business owner and are wondering if you can keep your business afloat while restructuring significant debt, please discuss your options with an experienced business bankruptcy attorney in your area.

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