This week, we told you about the bankruptcy filing of Matador Restaurant Group, a 22-unit Del Taco franchisee.
The operator’s sales challenges last year created financial headaches. The company received a series of merchant cash advances to get through that period. Within a few months it was in bankruptcy.
It’s been a tough year for Del Taco. This year alone, the fast-food Mexican chain reported its fifth straight same-store sales decline, temporarily closed its Colorado restaurants following the operator’s bankruptcy filing, and was put on the market by Jack in the Box.
That decision included this comment from the Jack in the Box CEO, which said that Del Taco would not “meaningfully contribute to the bottom line” over the next few years.
When franchised brands have sales challenges like this, it’s not uncommon for some of their lesser operators to face financial problems, particularly if those brands generate relatively low unit volumes.
Del Taco’s unit volumes last year were $1.6 million, about $5 million less than Taco Bell. Matador’s restaurants were in Georgia and Alabama, far from the chain’s California roots. Those locations likely had lower volumes than average.
But where this story is especially notable is the type of financing. Merchant cash advances, or MCAs, are some of the riskiest forms of financing available. Borrowers pledge future revenues in exchange for funds today. The financing is expensive, with effective interest rates as high as 50%.
Lending as a rule is risky, because companies that borrow funds make a bet they can pay them off, even if it means paying more than the value of the money received. But lending is a necessity for a restaurant business that relies on capital to expand.
Loans are best when used for productive expansion, such as opening a new location or buying a piece of equipment that can make an operation more efficient. Companies in theory can pay it off because those advances provide revenue they wouldn’t have otherwise.
If the MCA was used to generate more revenue, it might be justified. In this case, the financing was taken out as a bridge to get the company through a difficult period. Effectively, the company was digging itself into a hole, and within a short period of time found itself in bankruptcy.
Restaurant companies have faced a deluge of difficult news for five years. Soaring costs post-pandemic led to higher prices, which frustrated consumers that are now less likely to eat out.
That has left a number of operators struggling for answers on how to get themselves through this period.
For instance, the casual-dining chain Red Robin said that it would sell restaurants to franchisees both to fund its strategic initiatives and pay down debt. Its previous plan used sale-leasebacks to accomplish the same goals.
Red Robin has too much debt, and until recently its sales were weak, so it’s unloading assets in a bid to fund a turnaround.
They are hardly the only ones. Jack in the Box, the owner of Del Taco, is selling that brand and is in debt paydown mode. So is Krispy Kreme, which couldn’t even get its doughnuts into half of McDonald’s locations before pulling the plug on the initiative over profit concerns.
Those situations are different from the one the Del Taco franchisee faces. Those companies are cutting costs to pay down debt or selling assets to fuel initiatives or shift their focus.
But they’re all roughly in the same boat: Their operations are struggling, and there are relatively few solutions to help them navigate the environment.