After purchasing casual dining chain Fatburger in 2003, CEO Andy Wiederhorn fought for years to turn around the company’s performance. But, faced with an ineffective management team and the recession, he finally resorted to Chapter 11 bankruptcy filings for two of the restaurant’s west coast subsidiaries in 2009.
Since then, Fatburger has become one of the rare companies that have bounced back from bankruptcy, shifting from a struggling, 40-location U.S. chain to an $82 million franchise group with 120 locations worldwide. Wiederhorn shares four key factors essential to turning around his company.
1. Debt reduction. While Wiederhorn warns that resorting to bankruptcy is a “treacherous and expensive” way of dealing with debt, one of the biggest advantages is that livelihood-threatening debt is discharged or restructured.
Fatburger was able to reduce the debt carried by its two subsidiaries from $35 million to less than $8 million over four years. However, the company has also reinvested roughly $23 million in restructuring and operating expenses. Fatburger was cash-flow positive in 2011 — something which never would have happened without debt relief, he says.
2. Renegotiation. Because bankruptcy releases the filer from many contracts and agreements, Wiederhorn was able to renegotiate leases and work out new terms with suppliers. He restructured the business into a franchise model, which reduced the operating expenses and enlisted franchisees to have an ownership stake in the success of their locations.
Because of this he was able to illustrate to landlords and suppliers the benefits of continuing to work with Fatburger–without such a plan, it would have been more difficult, he says. But, he had to make the difficult decision to close 30 restaurants that were not generating sufficient cash flow.
3. Pricing and Marketing. The fallout from the bad economy left Fatburger’s pricier fare at a competitive disadvantage against other sellers in its market. So, after bankruptcy, the company introduced a smaller, lower-cost burger. It’s “Bite This, Economy” campaign promoted the downsized $2.99 burger in an attempt to generate repeat business from Fatburger lovers.
4. Overseas expansion. Wiederhorn knew that capital was more readily available in the Middle East and Asia than in the U.S., so he focused on international expansion, opening his first non-U.S. location in Canada in 2006 and then China the following year.
Today, more than half of the company’s franchises are overseas and Fatburger recently signed a major deal with a Shanghai-based investment bank to add hundreds of locations over the next several years in China, Taiwan, and Singapore, Fatburger is also exploring opportunities in Europe, the Middle East, and northern Africa.
While it’s more expensive to find real estate internationally, labor is cheaper and capital generally more available. Wiederhorn says he wanted to get a foothold in these regions before other casual dining chains did.
Gwen Moran is a freelance writer and co-author of The Complete Idiot’s Guide to Business Plans (Alpha, 2010).