Quick-Service Restaurant Chain

The Client

The Company was an 18 door Quick-Service Mexican Restaurant Franchise whose primary competitor was the Chipotle restaurant chain. The stores were based in and around Boston, MA with the Company receiving numerous awards from the franchisor for its creative marketing and growth strategies. Of the 18 stores operating, those with doors open greater than one year were cash flow positive (9), two doors were cash neutral and the balance of the doors were open less than one year were all burning cash to varying degrees. Lastly, due to the intended high growth of the Company, a corporate infrastructure had been built to allow the Company to grow to as many as thirty (30) doors within the next twenty-four months. There were no other Franchisors in the Northeast Region of the U.S. for Qdoba. The Company was also involved in the start-up and opening of an additional franchised casual theme restaurant whereby many of the same corporate personnel were also responsible for providing support to the casual theme restaurant and there had been undisciplined accounting with regard to assets, cash and liabilities incurred with regard to the opening of both Qdoba and the casual theme restaurants.

The Challenge

There were a total of three (3) senior lenders, each with its own identified senior position collateral, which were essentially the various doors that their capital had funded, two (2) junior lenders, one of whom was a related fund to one of the senior lenders and a group of five (5) individuals comprising a second group of Jr. secured lenders. There were no group landlords with the exception of one who had 3 doors. There was no equity value either implied or precisely on the balance sheet with the sole source of equity from the Company’s start provided by the owner operator and the lenders. Further, the Company was embroiled in substantial legal suits brought by various creditors and landlords any number of which could have forced an involuntary BK filing. While the Company had enjoyed certain recognition for its creative marketing and joint venture efforts from the franchisor, it had always struggled with its balance sheet condition and lack of growth equity capital. The Company had lost its credibility with all of its constituents, including the lenders, landlords and the franchisor. There was an impending cash wall with no plan or cash forecast and little support for additional capital from the lenders.

The Solution

Phoenix believed that the only opportunity to preserve any enterprise value was to immediately close the underperforming stores and radically reduce the corporate infrastructure to mission critical operations only. While ownership understood that the business was deeply insolvent with little chance of survival, it was concerned with the personal guarantees associated with two of the three senior lenders as well as the individual Jr. secured lenders being able to recover their investments. Phoenix’s solutions included negotiating both capital and royalty relief support from the Franchisee to keep the entire book of stores open during an “out of court” sale process and negotiating immediate standstill agreements with the lenders to allow for the out of court sale to occur. They led communications with key lawsuit constituents in an effort to negotiate standstill agreements and ultimately achieve bankruptcy avoidance. Phoenix established the potential out of court payments with all constituents and provided the critically necessary waterfall of payments to the various creditors by class and in what scenario. Phoenix ultimately negotiated a sale price from the Franchisee that was estimated to be a 5x premium beyond what would have been paid for the 9-11 cash flow positive/cash neutral stores assets in a 363 sale process and developed the out of court settlement strategy for each of the creditors. Phoenix then lead the negotiations with all of the Lenders Jr. Lenders and the unsecured creditors. Each class constituent received significantly greater recovery than what it would have otherwise received in a bankruptcy sale scenario. The owner operator was relieved of their personal guarantees and, other than losing their invested capital, had no go forward liabilities and retained total ownership of the casual them restaurant operation.