If it seems like we’re writing more about bankruptcies among restaurant franchisees these days, it’s because we are.
So far this year, at least 10 multi-unit restaurant franchisees have sought either Chapter 7 or 11 debt protection. That was more than all last year. And that does not include the small-scale bankruptcies, such as that of a two-unit Checkers operator this week.
More to the point, many of these bankruptcy filings appear to be simple matters that the restaurants can’t make enough money to pay all the bills. That is in contrast to classic bankruptcy filings in which companies took on way too much debt or did something else to spur the filing.
To be sure, there is some of that, such as the filing of the Popeyes operator Sailormen. But for the most part, these filings appear to be demonstrative of the simple fact that, in too many cases, operating restaurants is simply not a profitable venture right now.
The bankruptcy filing recently of Superior Star, which appears to be an acquisition gone wrong, featured several instances in which the operator was paying “dark rent” on several closed locations. That means the company felt it was better off paying rent on locations that made no revenue than it was to operate them as restaurants.
Several companies over the past year and a half have filed for bankruptcy with merchant cash advance debt. These are effectively payday loans, where companies pledge a percentage of their income. And taking out such advances can badly exacerbate operations challenges.
The restaurant industry has struggled over the past three-plus years with consistently weak traffic and a large set of customers who do not have the money to dine out as often as they once did, particularly given prices.
That, and the fact that industry profitability has taken a big hit since the pandemic, has created an environment that is tough on franchisees. More than four out of 10 restaurant operators told the National Restaurant Association that they did not make a profit last year. And while a lot of those are independent operators, it certainly includes franchisees.
The industry itself has done itself few favors by pushing growth above all else while deploying financial tactics that use franchisees more like profit centers than as partners in a growing brand.
While franchisors have the right to generate a profit, when those profits take too much bottom line away from franchisees, they set their brands up for long-term failure.
And many franchisors take on enormous sums of debt, often using whole business securitization financing. Sometimes that financing is used to grow the brand. Frequently it is not. And then when these brands face challenges in their brands, they are limited in their ability to fix the problems with the kind of investment necessary to do so.
Thus, we get a lot of franchisee bankruptcies. And given the way sales and traffic continue to go this year, that is unlikely to slow down anytime soon.