Financial adviser Tom Mullaney of Huntley, Mullaney, Spargo & Sullivan, Roseville, Calif.-based work-out specialists, has bad news for debt-ridden chains: Credit terms continue to shrink. Nonetheless, he adds, there's hope, because managements have finally sobered up to a new reality.

First, how did all this turmoil come about?

Corporations and the government have been gorging on debt for the past decade, and when you combine that with the slowdown in consumer spending, you've got flat revenues, increasing costs and a merciless squeeze on profit margins. If there is one common denominator in all this, it is that these are companies that have really loaded up on debt.

Where in the industry is it hurting the most?

Casual dining is getting hammered, on both the top line and dealing with profitability.

How do these problems compare with those of a few years ago?

Let's just go back three or four years ago when the economy was strong and access to both debt and equity capital was easy. We found our clients tended not to confront underperforming locations. Business was so good, they swept those problems under the rug.

But then last year happened?

Around August we noticed a sea change in the industry, when all of a sudden our phone began to ring off the hook. Folks would say, “We have a series of stores that aren't making it, and we have to deal with this problem now.”

It's a particularly painful situation for debt-ridden companies.

It goes back to those two problems I just mentioned: lots of debt and all of a sudden the top line is softening. Now the microscope comes out to try to get profitability back in line. That is the biggest change we have seen since '05.

The new reality?

We recently reviewed 900 locations of a multi-billion-dollar restaurant company that's traded on the New York Stock Exchange. We identified 110 locations that needed to be closed. That's 12 percent of operating capacity. There's a company saying it's not business as usual anymore.

Any others?

A large franchisee with over 100 casual-dining locations contacted me recently to say his lenders were getting a little restless. What, if anything, did they need to do to deal with the potential tightening of their credit line?

What did you say?

I can't comment on the specific advice I gave him, but I can say managements need to take these steps: First, be as absolutely open with your lenders as possible. Second, do a zero-based budget—a cash-flow forecast of the business. Third, identify the opportunities to improve the profits and then implement them ruthlessly. Sacred cows must be dealt with.

Even when they may be at the heart of the brand?

Even when they go to the essence of the company. I hear managements say, “We are really successful at operating multiple brands.” When you peel them away, one great brand is generating all the cash flow that's being siphoned into mediocre concepts. You have to tell them, you've gotten off base and you need to go back to your core.

Are managements still too optimistic about the future even today?

Managements are now taking a real sober look at the battlefield and realizing it's a pretty ugly fight out there.