Emilee Wentland
The list of sizable franchise operators who filed for bankruptcy in recent years is long and varied. Many were dealing with just one brand, but as EYM Group realized, problems at one entity can quickly lead to multiple bankruptcies and spiraling financial challenges.
With the continued rise of multi-unit, multi-brand franchisees, it’s worth examining EYM’s situation and what other operators can learn. Let’s take a look.
EYM Group, based in Irving, Texas, and led by Eduardo Diaz since its founding in 2008, owned Pizza Hut, Denny’s, Panera Bread, KFC and Burger King locations before filing for bankruptcy and selling off its units. From 2023 through this year, EYM was on the receiving end of at least three lawsuits from its franchisors claiming violations of franchise agreements.
In 2023, EYM’s Burger King division, EYM King, closed its 26 stores in Michigan after the franchisor sued the franchisee for unpaid royalties and missed ad fund payments.
In July 2024, EYM Pizza—its Pizza Hut division—filed for Chapter 11 bankruptcy protection. Earlier in the year, EYM sued Pizza Hut in a bid to keep the brand from terminating its franchise agreements, but a judge dismissed the complaint. The franchisor followed with its own lawsuit, which claimed the franchisee failed to pay royalties on time.
Before the bankruptcy filing, EYM Pizza closed at least 15 stores, plus at least one in Georgia without approval. More locations were shed during the bankruptcy process and EYM eventually sold its remaining 77 locations to the franchisor and five other buyers.
In August 2024, EYM Chicken—which at one time had at least 47 KFCs—closed more than 24 of its Midwest locations. By this summer, it filed Chapter 7 bankruptcy petitions for its KFC entities in Illinois, Indiana and Wisconsin.
Finally, in August this year, EYM Cafe filed for bankruptcy after Panera Bread sued the franchisee in May. The brand terminated EYM’s franchise agreements, but claimed the franchisee continued to operate its dozen-plus locations without permission. EYM Group remains a Denny’s franchisee, and a representative of the franchisor confirmed EYM operates 41 restaurants in Texas and Florida.
Strewn throughout EYM’s various bankruptcy and lawsuit filings are accusations that the franchisors neglected the brands and the franchisees, and didn’t keep pace with innovation. Sales suffered as a result, it said. Debt piled up.
When it rains, it pours. Having a large, diverse portfolio isn’t necessarily a bad thing. In fact, many franchisees—such as Flynn Group and Sun Holdings—have made a substantial amount of money this way. It can be a recipe for disaster, however, especially when unit-level operations aren’t tight.
But there are other, not-so-preventable reasons multi-brand franchisees can lose everything.
In May 2022, Manraj “Patrick” Sidhu unexpectedly died. He was the sole owner of Premier Cajun Kings and Premier Kings, operators of 30 Popeyes and 172 Burger Kings locations, respectively. His death brought on two bankruptcy filings—one for each brand—in 2023.
In court documents, Chief Restructuring Officer for Premier Cajun Kings David Baker said Sidhu’s death “triggered great operational instability” for the company. Baker wrote: “This tragic loss, coupled with various macroeconomic factors, has caused tremendous uncertainty and disruption within the business. Those factors include, among others, the national impact of the COVID-19 pandemic on restaurant operations, high inflation, increased borrowing rates and an increasingly limited qualified labor force.”
Consider the structure
Helen Fotinos, a partner at Canadian law firm Dentons, said multi-brand ownership is a double-edged sword. “Size definitely brings efficiency and it delivers certain advantages,” she said. “However, growth doesn’t always equal stability, and it carries with it some risks as well.”
So, if you have a few brands under your belt and issues arise in one, act quickly, Fotinos said. “Don’t bury your head in the sand and ignore it, because franchisors, increasingly, are acting faster and sooner on this,” she said. Franchisors are becoming more cognizant of early warning signs that a franchisee is headed toward financial trouble or bankruptcy.
“Deal with it head on. … Communicate [with the franchisor about] reassurance and an action plan and a management plan to address whatever the issue is,” Fotinos said.
Problems can arise from overextending resources, brutal economic forces, brand-level stagnation or poor management. Sometimes multi-unit deals put financial pressure on franchisees, Fotinos said, because they need to open a number of stores in a designated amount of time.
“If they’re developing or remodeling multiple units, multiple brands at the same time, those are high costs, which create a cash crunch,” she said. “You get into this ripple effect. When you’re squeezed in one level, that creates tension in the other.”
In the case of EYM, owning two brands within the same parent company can pose other problems. KFC and Pizza Hut are each part of Yum Brands. “Those agreements will have cross defaults, cross guarantees, where a breach of one location will equal a breach of another, allowing the franchisor to close multiple stores at once if you default,” Fotinos said.
When franchisors require franchisees to invest in remodeling, new technology or other changes, those costs quickly add up with more units. Franchisees need to consider these potential future costs to avoid financial devastation. “That’s a huge capital investment. If you don’t have the regular sales performance and liquidity to support that investment, that capex investment, you’re underwater quickly,” she said.
Often, these spiraling bankruptcies can be prevented, or at least prepared for. Growing too quickly frequently leads to store closures and money lost. Sure, it’s exciting to hit that X-unit mark, but if you have to close some or all of your stores, it’s not worth it.
“Scale isn’t the shield, it’s a responsibility,” Fotinos said. “The best-positioned systems, in my experience, are the ones that have built in early warning signals, that are managed well, that stay close to their operators and have clear transition plans if there’s financial stress.”
Emilee Wentland is managing editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to [email protected].