Financing

Remodels, a pandemic and Brazil led to the bankruptcy of a Wendy's franchisee

Starboard Group, the Wendy’s franchisee that sought debt protection this week, said a number of factors converged that led to the filing, including a failed Brazilian joint venture.
Wendy's bankruptcy
A Wendy's franchisee said the brand's remodels don't generate much return. | Photo: Shutterstock.

Starboard Group, the 61-unit Wendy’s operator that filed for bankruptcy this week, was undone by a variety of issues at the same time, from a heavy debt load with rising interest rates and brand requirements that it remodel restaurants and sell some others.

But it all started with some fancy Wendy’s restaurants in Brazil.

That, at least, is according to court documents included in the filing, the latest in a string of bankruptcy cases involving large franchisees of major brands and small restaurant chains.

A declaration filed by Andrew Levy, the company’s CEO, suggests that the operator faced a number of challenges at the same time that ultimately proved too difficult to overcome.

The filing suggested that it all started in 2015, when Starboard International Holdings had a 40% interest in a joint venture to operate Wendy’s in Brazil. That joint venture included 20% ownership from Wendy’s itself and 40% from an operator in the Latin American company.

That joint venture failed. “The stores had massive losses, in part because they were overly posh, which alienated a portion of the market while simultaneously requiring huge capital investment,” Levy wrote.

That “strained” the company’s management contracts and fees.

Meanwhile, Wendy’s apparently required that Starboard sell a pair of subsidiaries that operated restaurants in Virginia. Those restaurants were apparently profitable “and their departure meant that the remaining locations’ share of the aggregate management costs increased with less average profits per remaining location,” Levy wrote.

That isn’t the only sign of tension between Starboard and Wendy’s. Levy said that Wendy’s requirements that it remodel restaurants also played a role, “requiring substantial capital expenditures that have modest or no equivalent returns.” The operator has funded some of these remodels, but many remain.

Starboard then took $49.8 million in loans from City National Bank through the U.S. Federal Reserve’s Main Street lending program.

The company started making payments on those loans in 2021, at a time when sales were depressed and interest rates were increasing, Levy said in the filing. That stressed the company’s finances.

Meanwhile, all this was taking place during a pandemic that stressed operator finances, particularly in an inflationary aftermath.

The company closed restaurants that together lost $1.5 million per year. But the filing notes that its weaker restaurants collectively lose $2 million a year, implying it still has restaurants that lose $500,000 annually.

The closures may not be done, either. Levy wrote that Starboard could close some of those additional money-losing restaurants, and those that need to be remodeled.

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