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How a franchisor’s actions can damage franchisees’ bottom line

On Behalf of | Mar 28, 2022 | Franchise Law |

 

Buying a franchise can be highly profitable. But as experienced franchisees know, a good working relationship between a franchisor and its franchisees depends a great deal on trust. When a franchisor breaks that trust and takes actions that go against its franchisee’s interests, it might take litigation to enforce the franchisees’ rights.

Franchisees of FAT Brands, which owns several regional chain restaurants, are suing the company and its CEO for allegedly “running [the company] into the ground and bleeding it of its cash.” The Securities and Exchange Commission (SEC) is also investigating the charges.

Suspicious loans following a merger

The litigation is related to a corporate restructuring that FAT Brands announced at the end of 2020. A holding company called Fog Cutter Capital, which owned 80 percent of FAT Brands’ shares, merged with the restaurant company. As part of the merger, the lawsuit alleges, FAT Brands’ CEO, Andy Wiederhorn, and three directors received millions of dollars in loans from Fog Cutter, which pulled in nearly $40 million from FAT Brands to cover the expense.

“There was never a business justification for these loans,” the lawsuit states. “Wiederhorn used FAT Brands as a discount lender and plaything.”

SEC investigation into the CEO and COO

In February 2021, it was reported that Wiederhorn and his son, FAT Brands’ COO, were under SEC investigation for securities fraud, wire fraud, money laundering and attempted tax evasion. Wiederhorn denies the allegations. FAT Brands’ stock price dropped 24 percent on the first day of trading after the SEC investigation came to light. The plaintiffs filed suit four months later.

The last thing any franchisee wants is for their relationship with their franchisor to degrade to the point of litigation. But if it does happen, you need to ensure that your contractual and legal rights are respected.

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