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With the sale market dry, more chains turn to bankruptcy

The filing by Restaurants Unlimited shows that some companies have little choice but to seek court help so they can be sold, says RB’s The Bottom Line.
Photograph: Shutterstock

the bottom line

You can’t say that Restaurants Unlimited didn’t try to avoid this week’s bankruptcy filing.

Quite the contrary. The Seattle-based casual-dining concept operator, owned by private-equity firm Sun Capital, has been trying for three years to find a buyer.

Based on court documents, it has had plenty of interest, and went down the road with a couple of interested parties in each of the past two years before deals ultimately fell through.

Facing a cash crunch and unable to make its debt payments, the company filed for Chapter 11 this week.

The problems demonstrate a reality in today’s current market: Some chains are having so much trouble finding buyers that they have to seek court help to spur the process.

Recently, Perkins & Marie Callender’s acknowledged that it might have to file for bankruptcy protection to prompt its sale. In May, meanwhile, Kona Grill filed for bankruptcy protection so it could close locations and sell, likely to its former CEO.

Late last year, the owner of Papa Gino’s and D’Angelo Grilled Sandwiches filed for bankruptcy and closed a bunch of locations and sold itself.

Bankruptcies are a regular occurrence in a restaurant business that is loaded with companies and contends regularly with shifting consumer tastes while companies are frequently loaded with debt and often lease their locations.

Bankruptcies appear to be more common lately, largely because the operating environment in the past couple of years has taken its toll on a number of chains.

Indeed, on the same weekend that Restaurants Unlimited filed for debt protection, another Sun Capital-owned company, Boston Market, closed 10% of its locations as part of an out-of-court workout.

Casual-dining chain Houlihan’s, meanwhile, has hired a restructuring adviser amid declining earnings, according to Debtwire. Its debt comes due next year.

To be sure, most bankruptcies are done to fend off deadlines. Restaurants Unlimited, for instance, had only $150,000 in cash and had been unable to make its debt payment for months. But the company had also been on the market for years and was looking for an equity injection and couldn’t find one.

Bankruptcy filings can actually encourage a sale process because it enables companies to get rid of leases and reduce debt.

Many buyers might not be willing to take on a concept with a lot of struggling locations, certainly at a price strong enough to pay off whatever debt is owned on the chain.

As a result, sellers will use the bankruptcy process to dispose of leases and run an auction to get as much for the remaining assets as possible.

Restaurants Unlimited, unable to find a buyer outside of bankruptcy for three years, has a number of indications of interest from potential buyers at a theoretically lower price and without the burden of a half-dozen unprofitable locations—15% of its unit count.

This is a symptom of the current market for restaurant mergers and acquisitions. While many chains can command massive valuations and top dollar, others end up being sold for please-take-it-off-my-hands prices.

As such, we’ve seen deals with unusual and potentially super-cheap terms such as Fat Brands’ purchase of Elevation Burger. And we’ve seen a growing generation of brand collectors that snap up chains at bargain costs, hoping to squeeze more cash with a more efficient business model.

The difficult operating environment, coupled with sizable amounts of debt coming due for many companies, is simply prompting more of these sales in a bankruptcy process.

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