Be Prepared in Case Your Franchiser Falls

About the last thing someone thinks about when buying a franchised business is what happens if the franchiser declares bankruptcy.

But in this dicey economy, it is wise for both current and would-be franchisees to prepare for such a possibility.

People try to enter a closed Bennigan's restaurant in Santa Clara, Calif.

In recent weeks, casual-dining franchiser Bennigan's, which had been run by Texas-based Metromedia Restaurant Group, filed for Chapter 7 liquidation -- a going-out-of business proceeding that immediately closed 150 company-owned restaurants. The 138 Bennigan's that franchisees ran weren't included in the filing.

Also, franchisers Mrs. Fields Famous Brands LLC, a cookie and frozen-yogurt outfit, and Realty Information Systems Inc., which operates the Help-U-Sell Real Estate chain, filed for reorganization under Chapter 11 of the federal bankruptcy code.

Under Chapter 11, a company remains in business while it works out payment arrangement with its creditors. That plan may require a financial restructuring, including asset sales.

Preventive Measures

While franchisees have little protection from such events in their contractual agreements, there are steps they can take to help limit the damage to their businesses.

One is to have a contingency plan in place so you won't be making a hasty decision if your franchiser suddenly goes out of business, says Bob Richards, a franchising attorney with the Chicago firm of Sonnenschein Nath & Rosenthal LLP.

"Make sure you have an exit plan to rebrand [with a different franchiser] or go independent," he says. Often, a franchised system can "implode very quickly."

That involves doing your homework on what other affiliations would fit your location and your business style. Also consider the consequences of going it alone -- including having to line up vendors yourself.

Another safety net is to have a bigger hand in maintaining the health of one's business by joining a franchise that has an independent franchisee association.

Such a group will have more bargaining power than an individual franchisee when dealing with the franchise on operational issues, advertisements and promotions. It also could give franchisees greater clout with vendors and lenders.

Talk Up Your Status

If a franchiser does make a bankruptcy filing -- whether it's a reorganization or liquidation -- the public is likely to question the viability of every outlet under that brand.

So franchisees may want to squirrel away money that allows them to quickly put out advertisements that communicate to their local markets that they remain open for business.

"A lot of people thought we had closed," says Larry Briski, president of the Bennigan's Franchise Operators Association. In fact, two financial firms agreed to acquire the food chain, although many of the 150 closed restaurants aren't expected to reopen.

For their part, franchisers who find themselves in financial trouble should let their franchisees know, attorneys say. They also should keep them apprised of efforts to right themselves.

Mr. Briski agrees. "It could have been done in a more orderly fashion," he says of Bennigan's demise. "They did a slash and burn," Mr. Briskiadds, referring to the swift and surprising action that he contends hurt franchisees' sales.

Metromedia Restaurant Group says the company couldn't comment and referred questions to the bankruptcy trustee in the case.

By: Richard Gibson
Wall Street Journal; September 23, 2008

Dining Chains Shut Doors

Bennigan's, Steak and Ale To Liquidate as Glutted Restaurant Industry Shakes Out


After filing for Chapter 7 bankruptcy, the parent company of national chains Bennigan's and Steak and Ale on Tuesday shut hundreds of restaurants, putting thousands of employees out of work.

The move by privately held Plano, Texas-based Metromedia Restaurant Group knocks down two sit-down chains that have been part of the country's casual-dining landscape for decades.

About 200 restaurants were closed immediately, including all of the remaining 50 or so Steak and Ales. The filing eliminates full and part-time jobs for more than 9,200 employees, many of those in Texas, Florida and Illinois, three people familiar with the matter said.

Another 138 franchisee-owned Bennigan's sites aren't part of the filing and intend to remain open. They face a more uncertain future, however, given they'll no longer have the full support of parent company Metromedia Restaurant Group, a unit of billionaire John Kluge's Metromedia empire.

A company spokeswoman, Leah Templeton, declined to answer specific questions about the closings and the filing. In an email, she said that stores operated by franchisees are not named as debtors in the filings, and that future decisions regarding the affairs of the debtor companies will be determined and administered by a bankruptcy trustee.

In addition to Bennigan's and Steak and Ale, the filing includes a handful of Tavern restaurants, an experimental concept at Metromedia. It doesn't include the company's Ponderosa and Bonanza restaurants, which operate under Metromedia Steakhouses Co., she said.

The filing marked one of the largest Chapter 7 bankruptcies of a restaurant chain in recent history, according to restaurant consultancy Technomic, and is the most extreme sign yet of how midprice, sit-down restaurants are undergoing one of their worst periods in decades. Challenger, Gray & Christmas says the resulting layoffs constitute the sixth-largest mass job cut of the year.

High ingredient and labor costs are eating into profits, and several years of rapid expansion by bar and grill chains has left a glut of locations in the market. Pressures such as high gasoline prices and dwindling home values have prompted consumers to eat out less often or switch to cheaper fast-food meals.

Restaurant pioneer Norman Brinker founded Steak and Ale in 1966 in Dallas. The chain, with its dimly lit dining rooms, has billed itself as offering an upscale steak experience at lower prices. It was seen as a model for the casual-dining steakhouse chain, and many executives there went on to run other large chains.

Bennigan's, founded in Atlanta in 1976, expanded rapidly across the country in the 1990s, opening hundreds of its pub-themed restaurants to entice diners with over-size sandwich platters and happy hours. Irish-themed Bennigan's is known for fried Monte Cristo sandwiches, walls cluttered with antique photos and slightly lower prices than its rivals, like three-course meals for $10.99.

The venerable chains weren't able to survive in part because their menus and atmosphere failed to set them apart from the pack, said Ron Paul, president of restaurant consultancy Technomic.

"There's just too many stores in this category," said Mr. Paul, whose firm has done work for Metromedia. "Most of these places aren't even that full on a Saturday night." Chains have already started slowing their expansion and shutting locations, and Mr. Paul expects that will accelerate.

Other large national chains that have filed for bankruptcy this year include Vicorp Restaurants Inc.'s Bakers Square and Village Inn and Buffets Inc.'s Old Country Buffet. Those chains, however, are trying to restructure and eventually emerge from bankruptcy, while Bennigan's and Steak and Ale are planning to liquidate.

Metromedia Restaurant Group earlier this year violated terms of a lending agreement with GE Capital Solutions. It had been in negotiations with lenders since last year to stave off the filing, while closing about 75 stores and looking for a buyer, said two people involved in the matter.

Metromedia's largest lenders are GE and the Bank of New York, which also own most of the chains' real estate. Over the past year, the parent company has had to contribute about $100 million to meet payroll and some debt obligations, these people said.

Late Monday, managers at Bennigan's and Steak and Ale were called or emailed and told not to open restaurants the next day, according to two people familiar with the matter. Employees were told there wouldn't be enough money to pay them for the rest of the week, these people said.

The abrupt shutdown took employees and customers by surprise. At a closed Bennigan's in downtown Chicago on Tuesday, tables were still stacked with rolls of silverware, ketchup and menus, and the neon signs remained lit. Posted on the doors, however, were paper signs that read: "Sorry we are closed."

A hostess at that location, who declined to give her name, said she worked until midnight on Monday and was given no indication the store was in trouble. "I was kind of shocked," she said.

A growing number of struggling companies are opting to liquidate rather than try to restructure in bankruptcy. Bankruptcy lawyers say many are caught between a slowing economy, a lack of bankruptcy financing and loose, covenant-lite bank agreements that allowed their financial situations to worsen before creditors could intervene.

By: Jeffrey McCracken and Janet Adamy
Wall Street Journal; July 30, 2008