The bankruptcy filing this week by Golden Corral’s second-largest franchisee is at least the 35th such filing by a large franchisee or restaurant chain since the outset of the pandemic.
It won’t be the last, either. Even as restaurant sales surge, it’s entirely likely we could see more such filings as valuations for restaurant chains reset while landlords and lenders start asking for the funds they’re owed.
“What’s going to precipitate more bankruptcies is when banks have to start, ‘wait a second, it’s been a year, year and a half now, we need to get some money in,’” Dave Bagley, managing director of the investment bank Carl Marks Advisors, said on an upcoming episode of the Restaurant Business podcast “A Deeper Dive.” “That’s coming as summer approaches.”
The biggest issue, he said, is valuations.
Bankruptcy filings are most of the time transactional moves. The lender wants to be repaid. Or, in an increasing number of cases, it wants to take control of a company after having acquired the debt on the secondary market. Eighty to 90% of such filings lead to a transaction, Bagley said.
Valuation levels in the restaurant space were uncertain over the past year. That likely kept many chains out of bankruptcy because lenders had no idea how much the company was worth.
What’s more, Bagley said, the lenders didn’t have to push the issue. The same was true with their landlords—who have debt of their own. Lenders didn’t force them to pay off their debt because they didn’t have to.
This created a “we’re-all-in-this-together” scenario in which landlords didn’t force restaurants to pay all of their rent and lenders didn’t force them to pay off debt.
That gave chains more time to develop strategies for surviving the pandemic. It has likely kept many restaurants from closing—only 2% of the restaurants in the Top 500 closed last year, a remarkably small number. And only about 5% of casual dining restaurants closed, which is also small given that the typical casual dining restaurant lost about a quarter of its business last year.
“There was no one pushing the restaurant to do anything,” Bagley said.
This didn’t work for everybody, of course. Some chains were pushed into a bankruptcy filing quickly, and some landlords forced the rent issue. After all, it wasn’t as if there weren’t any bankruptcies or closures.
Now, restaurant sales are on the upswing—many chains have reported record sales in recent weeks and just about every sector is seeing post-pandemic highs, at least, as consumers spend their stimulus cash on restaurant food.
What’s more, Bagley said, some certainty on valuations is coming. At some point, the lenders know what they have. That could force more companies into bankruptcy court.
None of this is to say that we’ll have a massive rash of bankruptcy filings. But the industry isn’t entirely out of the woods when it comes to seeking out debt protection, even with strong sales. Indeed, as I was writing this we learned of 36th filing, this one from the 13-unit fast casual chain Meathead’s Burgers & Fries.