It’s not a great time to be Del Taco.
The Mexican fast-food chain just reported a 4.5% decline in same-store sales, its fourth straight decline, each one worse than the next. It is apparently not starting 2025 off all that well, either.
But then news broke out of Colorado that the chain closed all its restaurants in the state—there is one left, in Grand Junction. But then we came across the franchisee’s bankruptcy filing, which has only left us scratching our head.
The short of it: In 2023, Newport Ventures acquired 18 Del Taco restaurants in Colorado. It also inked a 10-unit development deal in the state. One year later, Del Taco moved to terminate the restaurants, because it didn’t pay a $125,000 development fee for that 10-unit deal, which reads to us like an excuse to terminate because the franchisor got seller’s remorse.
The franchisee filed for bankruptcy, claiming that the restaurants were in worse condition than expected, which led it to spend more than it expected. But by January the lender in the case was questioning some of the spending, as well as the ownership, while calling for a chief restructuring officer.
That officer was appointed in February. But two weeks later the lender pulled its support. And Del Taco employees in Colorado woke up Thursday morning to a letter saying they were out of a job because all the restaurants were closed. The story quickly spread through local reports, then social media, and then national media.
Del Taco publicly has said the closures are “temporary” and an emergency hearing has been set for Monday that could speed the timeline in which it can take control of the restaurants.
The company will almost certainly need to step in and start operating the restaurants itself. The company certainly has the ability. While the chain has been selling locations to franchisees in recent years, it still operates a lot of its own restaurants.
But make no mistake: Closing the restaurants is a difficult situation. The employees were let go. The food was all thrown away. The doors are locked. Once a restaurant is closed, getting them reopen is more difficult. And if the restaurants themselves were shuttered under a cloud of poor operations, then the brand’s reputation in the market is already damaged. Even if the company is able to take control of the locations, in other words, it will still require some effort to restore the brand image.
This has led to a few questions. Why did the restaurants get terminated so quickly after the franchisee bought them? And over a $125,000 bill? As the franchisee noted in the court filing, the operation generated $25 million in annual revenues and $2.8 million in net income. Del Taco in filings suggested the franchisee was a substandard operator that failed inspections. But that wasn’t mentioned in the chain’s filings about the termination. Still, companies don’t take steps like this for a paltry $125,000.
The lender in this case pulled its support for the restaurants, leading to the closures. Why didn’t Del Taco buy the debt from the lender? Franchisees and other investors have been using that route to take control of companies for years. Why couldn’t the company do it in this case? As both the franchisor and senior lender Del Taco would have been in full control of the bankruptcy case.
The lender is owed $9.5 million. Even if Del Taco paid the face value of the debt, the expenditure would have been worth it. The company could then have arranged a debt-for-equity swap in the bankruptcy case, take ownership of the restaurants, get them fixed up and resell them to someone else.
Maybe that would not have worked. But the broader issue here is Del Taco sold an entire state’s worth of restaurants to an operator that was terminated a year later. We would not have heard about that at all until the lender pulled its support and the restaurants closed.
The real lesson here, perhaps, is to not put all your eggs in one basket. We’ve seen a lot of franchisees in struggling brands file for bankruptcy and close large swaths of locations in the past few years as the operating environment has grown difficult. But many of these franchisees live on the edge almost from the get-go. And their failures have created enormous headaches for the franchisor.