Franchisee of Six McDonald’s Units Files Chapter 11 Bankruptcy

by San Antonio Attorney

A franchise of McDonald’s Corp.  with six locations in Iowa file for Chapter 11 bankruptcy on Nov.  18, blaming growing rivalry from McDonald’s itself and other food chains.

Brown Customer Delight Group Inc.  used to have a total of 10 units in Des Moines but since sold four locations due to financial losses and large debt.

In a bankruptcy filing this week, the franchisee said that tougher competition in the industry led to poor revenue in recent years.  The company also pointed out that McDonald’s new restaurants stole revenue from its locations.

The restaurants made $7.6 million up to August, but based on bankruptcy papers filed, revenue shrunk by $4.5 million last year, when the company stated a loss of just below $900,000.  Brown Customer Delight Group stated $15.6 million in debts and $6.7 million in assets.  It owes $6.1 million to Citizens Bank of Boston, its biggest secured creditor.

Franchisees of McDonald’s rarely file for bankruptcy, partly because the chain’s franchise agreement stoutly discourages it, according to McDonald’s consultant Richard Adams.  Distressed operators normally find buyers to their franchises, he said.

Adams said a struggling franchisee normally sells the unit to another franchisee and hope that after paying off the franchisee is left with some money.  On the other hand, the bankruptcy process puts total control to the franchisor and the courts.

In this case, the operator had a trio of locations in Minneapolis for ten year before selling those units to acquire locations in Central Iowa.  The deal was made in 2011.  Part of the agreement was to renovate the locations, the bankruptcy papers show.

But the units failed to meet revenue expectations, requiring Brown to borrow more funds to pay for the cost of the renovation, which were finished in 2012.

Brown sold five restaurants in an attempt to decrease debt, but the sale of the units didn’t pay off the debt.

This year, it needed more funds to cover its shortfalls and sought help from a consultant to find solutions to its problems.  There were no recommendations from the consultant.

In August, McDonald’s terminated  its franchise deal with Brown, and the company sought for bankruptcy protection.

 

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