Back to basics
By Mike Mitchelson

Imagine your name in the headline of the local daily newspaper. Would it be good news or bad?

How about a headline that leads into a story detailing your financial difficulties. And, on top of that, a couple lawsuits against you. And the impending downfall of part of your business.

That story belonged to David Fhima, owner of fhima’s and LoTo in St. Paul, and the recently closed Louis XIII in Edina. The St. Paul Pioneer Press broke the news in June, detailing a list of lawsuits and overdue payments to vendors and government agencies amounting to about $900,000.

Fhima is familiar with the press. He gained acclaim in the Twin Cities for his skill in the kitchen, his unabashed friendliness toward media and his guests, and the flash and style of his restaurants.

This time, instead talking about his latest project, he found himself answering questions about the viability of his restaurants and the Internal Revenue Service. But he remained positive, at least outwardly. “I can’t become cynical,” he said. “Being in this business, you have to be optimistic.”

Yes, there are problems, but the recovery began before the story broke, he added. But he doesn’t harbor bitterness about his business finances becoming public, the result of which possibly cost him the chance to build a restaurant in the Stimson building in downtown Minneapolis, home to the Pantages Theater. “I’ve had the good press, too,” he said. “I put myself out there. Call it pride, call it ego—it’s taking risks. I have to take chances putting myself out there; I’m like a dartboard. And I have made a lot of mistakes. Louis XIII was a mistake. The concept was not, but the location (in Southdale Mall), yes. And I made the mistake of not cutting it loose anytime sooner.”


Changing philosophy

Fhima blamed much of his financial issues on the “underperforming” Louis XIII; it was a financial drain, and it caused him to lose focus on the other restaurants, which then suffered from his neglect. His loss of focus also revealed a lack of proper management infrastructure. “I tried to be everywhere,” he said.

Keeping a presence at three restaurants is extremely difficult, said Eliot King, who, with his wife Jennifer Jackson King, own Minneapolis restaurants Prima and Three Fish, and the Big Buck Roadhouse in Minnetonka. They added a director of operations when they opened Big Buck in 2004 to help with oversight. “You do one restaurant, then you do two, and you feel really good about yourself and think you can do another one,” he said. “But doing that third one really takes it to a whole different level of trying to be everywhere.”

King said he and his wife “are still in the restaurants every day,” but the third person helps tremendously. “We have three people and each one could be in one of the restaurants if necessary.”

Fhima admits he is a “control freak.” “I have pride, which translates into ego. When it’s bad, it translates into mistakes. …I’ve had to change my philosophy, and not micromanage, to trust the abilities of my employees.”

One step to dampening his controlling impulses was to hire recently restaurant veteran Michael Morse as general manager at LoTo. Another was to bring on board business partner Rob Nelson.

Nelson, a financial advisor for corporate executives, said he views Fhima as almost a “textbook case” of an artist “who establishes a business with his strengths—which are cooking and interacting with people.”

Then, over time, Fhima “spent more time outside the core activities he’s really good at,” namely the day-to-day operations of managing the business. “And our goal is to get David back to doing what he’s really good at, which is taking care of everybody who walks in the door and producing quality food, and have myself and my group take over more and more of the business side of it over time.”

Nelson, who also helps manage a variety of businesses, initially became involved with Fhima on the Stimson project—his first foray into restaurants—about a year ago. The revelations in the press were not news to him—he conducts serious due diligence with every business venture he does. “The one thing I’ve seen and experienced in a very short period of time (in this industry) is there’s this circle of rumors on everything,” he said. “With David, it was almost a weekly occurrence. Every time I brought up his name, there was a reaction. Every time I heard a negative rumor, I wanted to check it out and see if there’s any relevance to it.

“As I did that, I’d ask David (about it). He’d give me his version, and I’d do the background on it. What I discovered over that year was that with David, everything comes back to good intentions. And that’s what really attracted me to doing some work with him.”

The restructuring “is in the second inning,” Nelson said, adding that Fhima has dealt with “a perfect storm” of disaster beginning about two years ago, from Louis XIII never taking hold, to LoTo losing an investor, the NHL strike and its effect on fhima’s, and then, of course, the lawsuits. “One part is a recovery effort from all that, and the second part is just getting grounded in the business and reviewing every process we have,” he said. “What are the processes to understand current revenues, expenses and sales volumes? And we need to make that information available on demand, so we can take short term, quick control of what’s going on.”

Nelson said taking over the business process has been slower than he would like, because of how deeply Fhima has integrated himself into all functions. “I have the same (control) issue myself,” Nelson said. “He’s had a tough time letting go. So it’s one week at a time, one step at a time, one business item at a time, taking that off his plate.”

Fhima understands he needs to pull back. “At the end of the day, I am a chef. I love French Mediterranean cuisine, and that’s what I compete on very well. I’m going to let the business side be handled by those who love it (as I do the kitchen).”


Head above water

Fhima emphasized that declaring bankruptcy never crossed his mind. “I try to do it the right way, and pay people,” he said. “That creates a series of problems, and now we look bad. The attitude in business today is that you’re better screwing everybody (by declaring bankruptcy)—it makes the headlines, and then it’s gone. But I’m not going to do that. I’m going to keep working; there is a way out.”

Which is good news for his vendors. The ripple effect of a troubled restaurant company radiates broadly, and distributors and suppliers get hit first.

Distribution is a low margin business, relatively speaking, said Roger Peterson, credit manager for Upper Lakes Foods. ULF has no affiliation with Fhima, but, like any distribution company, has dealt with financially troubled restaurants. “Any time you suffer a loss, or have a client that’s going to end up in bankruptcy or not pay you, it takes a long time to make up that loss.”

Once a restaurant reaches that point of difficulty, it’s best if the supplier attempts to work out a payment plan. “Because once it gets to the point they’re going to shut the doors, your chances of recovery certainly become less,” Peterson said.

A Fhima supplier, The Fish Guys, sued him for $40,000. They settled on a payment plan amounting to $33,000. “That didn’t have to be a lawsuit,” Fhima said. “But they wanted to protect their interests, and I understand that.”


Road to recovery

“I don’t doubt my abilities as a chef and restaurant owner,” Fhima declared. “A lot of other owners would have folded.”

He’s paid down debt and had payment plans with the IRS and Xcel Energy in place before the Pioneer Press story broke, he added (see sidebar for details). He closed Louis XIII, and is waiting for the landlord to decide if they wish to have Fhima change the concept or part ways.

The Stimson building restaurant project is also on hold, even though the investors knew of Fhima’s woes before the bad press. “(The press) was unfortunate,” Fhima said. “But if the deal falls through, that’s alright. I’m focused on these two restaurants. …We’re streamlining, and getting back to basics—serious food and service.”

Recovery includes getting Fhima back in the kitchen at his eponymous restaurant. “He is unbelievably talented as a chef,” Nelson said. “How we’re going to make a fhima’s successful is where the only thing David will work in is the kitchen, interacting with guests, the media, public events, cooking classes, and working on the design and feel of his restaurants.” Nelson also said Fhima’s talent can be applied to training the cooking staff to deliver the same quality when Fhima has a night off.

LoTo needs financing to finish it, Nelson and Fhima said. The restaurant is an ambitious concept, offering not just dining, but baked goods, a coffee shop and, eventually, a wine store. “We need to have solid training for service and staff, and the menu needs to be tight,” Nelson said. “Those are the things that we have to take one step at a time.”

That suits Fhima just fine, who, after all the press, appears relaxed and ready to move forward. What’s been a pleasant surprise through all the problems is that amount of support he’s received from other restaurateurs, he said. “This humbles you. It gets you to focus on what you really need to do. And this will be a great story, in the end.”


Fhima’s financial issues:

• The IRS filed several liens against Fhima’s restaurants totaling about $180,000. Fhima said he worked out a payment plan. The deal, he said, was to pay what the restaurants owed for the fourth quarter of 2005, and regular payments on the remainder. “We’ve done that, and cut down substantially on what we owe. I am comfortable saying that between six and 12 months all that will be taken care of.”

• The $320,000 lawsuit filed by Laurel Village Tower against Fhima for back rent for the Minneapolis Café, which he closed in 2004: Fhima filed a countersuit in June. “It’s been tried; we’re waiting for the verdict in about three months,” he said.

• A $365,746 lawsuit filed against him by a former employee of a Los Angeles restaurant he ran: The suit dates to 1994 and stems from a $10,000 wrongful termination lawsuit. “I didn’t hear about this until four months ago,” Fhima said. His attorneys are working to get the case dismissed. “The lawsuit against the company was dismissed, but the one against me stayed. It’s strange.”

• The lawsuit filed by the architectural firm Hammel, Green and Abrahamson Inc. for more than $100,000 for work done on Louis XIII and LoTo: “We sued each other, and we’re waiting (on a verdict),” he said. There’s no financial liability against Fhima’s restaurant company, Les Enfants. The case is already paid for—a bond was filed to cover the verdict should it be against him, Fhima said.

• The $48,000 Xcel bill, which resulted in the power to LoTo being shut down for six days in May: The restaurant was paying its energy bills, Fhima said. Problems began when he received a bill from Xcel for $30,000. “We call Xcel and ask what’s going on—we are supposed to be billed for three meters,” and the restaurant was being billed for only one. Xcel tried to collect on the two they missed in full, he said. “Tell me what restaurant can take that hit. … (but) we could have made arrangements, they chose not to. (There were Xcel employees) who were very helpful. But others were very unhelpful.”