Creating Going Concern Value

Challenge

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125 restaurants located in Virginia, Illinois, Pennsylvania, Ohio, and North Carolina

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• Private Equity Owned Company struggled to generate positive cash flow due to numerous unprofitable locations, rising labor costs, and food cost inflation.
• Substantial liabilities owed to Franchisor ($6M for Royalty and Marketing Dues) and Landlords ($2M for past due rent).
• In hot water with Franchisor over deferred Capital Expenditures (~$30M), the majority of which was for “brand reimaging” updates.
• At the time MorrisAnderson was engaged, Company expected to run out of cash in one week if a plan was not developed.
• Bank had risk of loss of over 85% on $36M loan.
• Prior consulting group calculated that bank needed to fund a $10M DIP Loan to sell the company in Bankruptcy.

Solution

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• MorrisAnderson was engaged as Chief Restructuring Officer and worked with Management to quickly develop restructuring options.
• Immediately shut 35 unprofitable locations over Franchisor’s objection.
• Filed Chapter 11 Bankruptcy in Northern District of Ohio with a Stalking Horse bidder five months later to execute a 363 Sale.
• Because of shutting unprofitable locations and deferring selective expense payments, Company was able to operate in Bankruptcy using Cash Collateral and without a DIP loan.
• Engaged in negotiations with landlords for lease reductions.
• Prepared a thoroughly vetted Cash Collateral Budget for Chapter 11 process.
• Created a milestone-based Key Employee Incentive Plan (“KEIP”) compensation structure.
• Worked with Investment Banking firm to market the Company to ~400 prospective buyers and MorrisAnderson worked with Bank to allow Company time to improve EBITDA and sell the business.

Results

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• Held a 363 Auction Sale, wherein restaurants were auctioned off by geographic markets.
• Sold 82 of remaining 90 locations to four respective buyers.
• Bank recovered 63% of $36M term loan, greatly exceeding original expectations of only a 15% recovery.