Iconic burger, pizza chains close stores as bankruptcy sale looms

Once a chain files for Chapter 11 bankruptcy, it runs the risk of being forced to close part, or all, of its operations. In some cases, the bankruptcy court can even force it into a Chapter 7 bankruptcy liquidation.

As part of the process, the court will consider whether the company can satisfy its creditors and vendors by remaining in operation. It also tests whether it’s likely to be worth more as an ongoing concern or having its assets sold off.

“Under this test, the court will look at the entire financial picture of the debtor, including its actual prospective income, its assets, and the liens on those assets, and will determine whether or not, after proceeding through the reorganization process, a viable company is likely to emerge. If the debtor has little income or the ability to generate income, there is little to rehabilitate,” law firm Newman, Simpson, and Cohen shared on its website.

That’s the situation facing FAT Brands, which has been closing Fatburger and Fazoli’s Pizza locations as it tries to avoid a forced bankruptcy sale.

FAT Brands closes select restaurants

As part of its Chapter 11 bankruptcy process, FAT Brands has been closing select restaurants. That has included closing 39 Smokey Bones locations, while turning others into its Twin Peaks sports bar concept.

The chain has not shared a list of specific shutdown plans, but its Fatburger and Fazoli’s Pizza Brands have faced selective shutdowns.

ALSO READ: BBQ chain shuts 14 more locations amid Chapter 11 bankruptcy

“FAT Brands plans to use the filings to deleverage the balance sheet, maximize value for its stakeholders, and support continued growth of its brands,” the company shared in a press release. “FAT Brands’ portfolio of 18 restaurant concepts encompasses more than 2,200 locations worldwide. Iconic brands such as Fatburger, Johnny Rockets, [and] Round Table Pizza, among others, are expected to remain operating as usual during the Chapter 11 process.”

As part of its Chapter 11 process, FAT Brands will be trying to renegotiate certain leases, and when it fails to do that, certain restaurants will close, according to a motion filed in U.S. bankruptcy court.

“The Debtors seek entry of an order, substantially in the form attached hereto
authorizing the Debtors to reject certain unexpired leases of non-residential real property,” FAT Brands asked the court.

In addition to the Fatburger and Fazoli’s locations, which have closed, the parent company asked the bankruptcy court to terminate leases for three of its other brands, according to documents filed on PacerMonitor.

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The Beverly Hills, Calif.-based restaurant chain operator filed a motion in the U.S. Bankruptcy Court for the Southern District of Texas on Jan. 27, asking for permission to reject the leases of 23 Smokey Bones, seven Yalla Mediterranean, and two Johnny Rockets locations nationwide.

“FAT Brands, which operated over 150 company-owned restaurants when it filed its petition, would eliminate over $492,000 in monthly lease payments if the court approves the motion to reject the 32 restaurant leases, court papers said.

Fatburger closures

It’s important to note that since most FAT Brands locations are franchised, it’s difficult to know which locations are closing due to the Chapter 11 filing, and which ones were closed for normal business or operating reasons.

New Braunfels, TX: Fatburger permanently closed less than two years after opening as part of a Texas expansion, according to MySanAntonio.San Antonio, TX region: Several Fatburger locations have shut down amid parent company struggles, added MySanAntonio.Franchise actions: Some franchisees are shutting down Fatburger locations or repurposing sites to distance from corporate issues, reported Fast Company.Fazoli’s closuresIndianapolis area, IN: Three locations in Indianapolis and one in Carmel permanently closed following parent company pressures, according to the Indianapolis Business Journal.Michigan locations: Restaurants in Walker and Muskegon were permanently shut, leaving only a few remaining open locations, reported WGRD.

Fatburger could be sold as part of a larger asset sale.

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FAT Brands’ creditors want a sale

FAT Brands faces pressure from its creditors, who filed a court document calling for the liquidation of the company’s assets.

“One of the Debtors’ main goals for Mediation is to gain alignment on a path forward
for these Chapter 11 cases. At this time, the Debtors believe that potential going-concern asset sales may be value-maximizing and that the proposed Bidding Procedures are designed to maximize the value the Debtors may receive from any such sale(s),” according to the documents filed in the United States Bankruptcy Court for the Southern District of Texas.

The sale will be challenging for a number of reasons.

“FAT Brands has a somewhat atypical financing structure, which adds a bit of complexity, but from a big picture standpoint, it’s a typical bankruptcy because the bankruptcy will provide an opportunity for the company to get back on its financial footing,” Jerry Bregman, bankruptcy expert and attorney at BG Law, told Nation’s Restaurant News.

A sale may actually improve operations for the individual brands.

“There are a lot of shared costs that can be reduced, and there are efficiencies that can be gained from that collection of brands. It’s a positive cash-generating business, however, it’s overleveraged,” he added.

Related: Another Mexican restaurant chain files Chapter 11 bankruptcy

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