Todd Graves, the founder and co-CEO of Raising Cane’s Chicken Fingers, nearly lost his fast-food empire due to a risky financial strategy early in his entrepreneurial journey. Now worth an estimated $9.5 billion according to Forbes, Graves’ path to success was fraught with challenges and close calls.
In the beginning, Graves had to work grueling 90-hour weeks at an oil refinery and brave the Alaskan waters as a salmon fisherman just to raise enough capital for his first restaurant location. As he expanded the chain, Graves employed a high-risk funding approach that he now admits was “stupid.”
The young entrepreneur secured loans from private investors at a steep 15% interest rate. He then leveraged this borrowed money as collateral with community banks, who treated the debt as equity, enabling him to obtain even larger loans. This strategy allowed Graves to maintain over 90% ownership of his company, but it also put the entire operation in a precarious position.
The true test of this risky approach came in 2005 when Hurricane Katrina devastated the Gulf Coast region. The natural disaster forced 21 out of Graves’ 28 stores in the Baton Rouge area to close temporarily. This sudden halt in cash flow nearly caused Raising Cane’s to default on its loans, potentially costing Graves everything he had built.
“I tell entrepreneurs, ‘Don’t do that,’ because my dream almost just went away,” Graves shared on the “Trading Secrets” podcast in May. The business managed to survive, largely due to its ability to reopen relatively quickly after the hurricane. However, the close call taught Graves a valuable lesson about balancing risk in business.
Today, Graves maintains a much more conservative approach to debt management. He ensures that Raising Cane’s keeps its debt-to-equity ratio below 3:1, meaning the company has less than three dollars of debt for every dollar it owns.
Bryan Bean, executive vice president of corporate banking at Pinnacle Financial Partners, emphasizes the exceptional nature of Graves’ success given his initial high-risk strategy. “Many business owners who hold that kind of debt may not make it to the other side,” Bean explains. He notes that keeping a leverage ratio below three times EBITDA (earnings before interest, taxes, depreciation, and
amortization) is considered the industry standard, with even lower ratios often more appropriate for smaller companies.
While taking on debt can be beneficial for growing a company – as noted by the late Charlie Munger, former vice chairman of Berkshire Hathaway – the risk lies in a business’s ability to manage and repay that debt, especially in the face of unexpected events like natural disasters.
Graves’ ability to not only survive but thrive, transforming Raising Cane’s into a business that generated $3.7 billion in net sales last year, is a testament to his resilience and adaptability. Bean commends Graves’ achievement, noting the increased difficulty due to the high-cost debt structure: “It’s a really impressive thing that he’s done. 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.”
Reflecting on his early decisions, Graves attributes his risky moves to youthful inexperience: “I was in my 20s and I was stupid.” His journey serves as both a cautionary tale and an inspiring story of entrepreneurial perseverance, demonstrating the fine line between calculated risks and potentially ruinous gambles in the world of business.