Bankruptcy Filings Spark Questions About Restaurant Franchisee Outlook | Franchise Insights

Filing for bankruptcy is a last resort for franchisees. There are often a variety of remedies franchisees can try before taking that step, Lathrop GPM attorney Robert Haupt said. “You can be a bankruptcy-eligible client, who has no intention of filing for bankruptcy, or you could walk into my office and say, ‘Hey, I need a bankruptcy.’ And I’ll say, well, not so fast,” Haupt said.

At any given time, Haupt could be dealing with hundreds of bankruptcy cases at varying stages in the process. In 2023, attorneys noticed more franchisees filing for bankruptcy compared to recent years. Three major Burger King franchisees, among others, filed for Chapter 11 bankruptcy protection.

An 8.7 percent increase in systemwide sales at Burger King in 2022 shows macro sales growth for the brand with nearly 20,000 stores across the globe. But the three franchisees that filed last year cited slower foot traffic, higher costs and low sales.

Franchisees TOMS King, Meridian Restaurants Unlimited and Premier Kings filed for bankruptcy in 2023, for a total of 278 Burger King restaurants impacted. Premier’s sibling company, Premier Cajun Kings, owned 30 Popeyes, 11 of which closed before it filed March 14, following the unexpected death of the company’s owner, Manraj “Patrick” Sidhu.

Poor performers

TOMS King filed for Chapter 11 protection January 2, 2023. According to the filing, the 90-unit operator put up all of its locations—spanning Illinois, Ohio, Virginia and Pennsylvania—for sale. MorrisAnderson CEO Dan Dooley served as the chief restructuring officer for the company. “They were out of cash,” Dooley said. “About 50 of those restaurants were money-losing restaurants.”

For TOMS, Dooley had two options: run out of cash and not pay employees, or shut down about 50 stores. They chose option two. “Burger King, of course, didn’t like that because it didn’t want us to shut down restaurants, but we had no choice. So, we shut down restaurants,” he said.

Following the meeting with Burger King, Dooley brought in a real estate consultant to renegotiate leases, which saved about $1 million a year, thus improving restaurant value, he said. All but about 10 restaurants were later sold, Dooley said.

TOMS had about five parties bid for restaurants and outbid a stalking horse bidder that Burger King rejected. Those stores continued operations and employees could keep their jobs. The leftover units closed, Dooley said. “Everyone walked away, I wouldn’t say happy, but happy compared to what the alternative was,” he said.

Meridian was next to file, in Utah, March 3. Led by James Winder, the company was reportedly seeing low sales since Winder bought a majority stake in the group in 2018. Meridian’s founder, David Harper, purchased underperforming restaurants “with the unrealized objective to grow annual volumes,” Winder told Franchise Times in March.

Premier Kings submitted its filing October 25, following sibling group Premier Cajun Kings’ bankruptcy filing earlier in 2023. In legal documents, Premier’s chief restructuring officer, David Baker, wrote Sidhu’s death “triggered great operational instability.”

The leaders of the aforementioned franchisee groups did not respond to requests for comment. Burger King didn’t respond either, but told Franchise Times via a statement in January 2023: “Over the next year or so, we anticipate a few franchisees will likely leave the system, and we will proactively manage those transitions. The restaurants will ultimately be owned by high-performing franchisees and other proven operators from the restaurant industry.”

Another major filing last year was Summit Restaurant Holdings, a Colorado-based Hardee’s franchisee that at one point owned 145 restaurants. Summit filed May 4 and sold 39 stores after the declaration. High Bluff Capital Partners—which owns Church’s Chicken, Quiznos and Taco Del Mar—bought 81 stores in August from the former owners. Summit is part of a larger company, Capstone Restaurant Group, which at one point owned 220 Hardee’s and Carl’s Jr. locations in 16 states. Now, the company operates more than 110 Hardee’s and Carl’s Jr. stores in 10 states, according to Capstone’s website.

Bid the bad farewell

Dooley’s noticed an increase in the number of franchisees filing for bankruptcy. The restaurant space has changed significantly since the pandemic began, with takeout being more popular and downtown areas less busy than before, with more people working remotely and shopping centers losing popularity. Rising costs are another factor. “The whole thing of what restaurants are good and what restaurants are bad, it’s really changed,” Dooley said.

According to Epiq Bankruptcy, a U.S. bankruptcy data provider working with the American Bankruptcy Institute, the United States had 332,138 total bankruptcy filings in the first nine months of 2023, up 17 percent over the same time period the previous year. The country saw 18,680 commercial filings overall, also representing a 17 percent increase over 2022. The total number of Chapter 11 commercial filings by October 2023 was 4,553, according to Epiq, a 61 percent increase.

Dooley expects more multi-unit restaurant franchisees to go bankrupt in 2024, particularly in brands that haven’t performed as well in recent years, like Burger King or Hardee’s, he said.

“There’s a shaking up going on in restaurants right now, and that’s probably a good thing long term,” Dooley said. In the short term, though, we could see more bankrupt restaurants or operators, he said.

When Dooley’s clients file, usually 20 percent of a franchisee’s stores should be closed. It’s not as simple as hanging a “closed” sign on the window, though. Franchisees have leases signed that aren’t easy to terminate or renegotiate, Dooley said, on top of agreements with franchisors.

“Generally speaking, there’s just too many restaurants out there that need to go away,” he said. “The brand doesn’t want to let you out of any stores. The brand exists solely to—and this is my cynical view—to tax those restaurants. … You almost have to say, I understand you don’t want us to, we have no choice, so we’re going to shut them anyway.”

Emilee Wentland is managing editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to [email protected].