Takeovers on Waffle House menu

Waffle House Inc., which took over 121 restaurants owned by a failed franchise in February, could be called on to assume more than 100 units in Tennessee, Kentucky and Mississippi. Waffle House restaurants: About 1,600 Corporate-owned: 921 (including 121 former franchise locations and four new stores)

Atlanta Business Chronicle
April 3, 2009

Takeovers on Waffle House menu
J. Scott Trubey

Waffle House Inc., which in February assumed control of 121 restaurants belonging to its oldest and largest franchisee, might be called on to take over the assets of another troubled partner.

Nashville, Tenn.-based SouthEast Waffles LLC filed for Chapter 11 bankruptcy protection last August.

The reorganization of SouthEast Waffles is still pending in bankruptcy court, said Jon Waller, chief legal counsel for Norcross-based Waffle House, and it is “too soon to predict” if the brand might assume the company’s assets.

A resolution could come in 90 days, Waller said.

“We have a large interest,” Waller said. “It’s our flag, it’s our brand and we care a lot about what happens to that business.”

The situation with SouthEast Waffles follows the failure of Tampa, Fla.-based Northlake Foods LLC, Waffle House’s oldest and biggest franchisee, which the venerable Georgia chain acquired out of bankruptcy Feb. 4.

With the acquisition of Northlake, Waffle House now owns and operates more than half of the chain’s restaurants for the first time since 1995. The chain has about 1,600 units, with 917 under corporate control.

SouthEast Waffles has been rocked by allegations of “gross mismanagement” by its creditors and has closed several stores.

At its peak, the company operated 115 Waffle House restaurants in Tennessee, Alabama and Mississippi.

In a Sept. 16 filing in a Tennessee federal court, SunTrust Banks Inc. accused the debtor of “gross mismanagement” of the company. The Internal Revenue Service claims past-due employment taxes, interest and penalties of about $2.8 million.

Waffle House, FirstBank and SunTrust are among SouthEast Waffles’ largest creditors.

Gary Murphey, a corporate turnaround specialist with Atlanta-based Resurgence Financial Services LLC, joined SouthEast Waffles last year to help manage the company. SouthEast Waffles is still making money and paying its vendors, Waller said, and most of the restaurants are in good shape. The franchises are not in danger of a mass closing.

“It can be very damaging for your brand, but fortunately our brand is very strong,” Waller said.

Despite the recession, sales for Waffle House restaurants are holding up, spokesman Pat Warner said. As a private company, Waffle House does not disclose financial information.

“We are still growing when a lot of our competitors aren’t,” Warner said, adding the chain opened four new stores this year. “We’re hopeful. We’re at a good place. This is a good time for us.”

Fast food and low-cost restaurants are faring well in the recession, and the struggles of these Waffle House franchisees are not an indication of brand weakness, said Dave Pavesic, a professor specializing in restaurant management at Georgia State University.

“It’s certainly not an issue with Waffle House,” Pavesic said. “It’s not a matter of the concept weakening or the demand of the product weakening.”

Brad Neave, an Atlanta-based franchise consultant with Franchise Network Group, said it’s common for brands to buy back “underperforming” individual restaurants or five- to 10-unit franchisees.

“[But] it is fairly uncommon that a franchiser buys back a territory or area with as many units as this,” Neave said. Franchisers typically look to foster a deal with equity firms or a holding company, he said, but with issues of mismanagement, a sale to another firm was unlikely.

“Either way, Waffle House had to step in to protect the brand, and correct the issues,” he said.

“It will be interesting to see if this scenario begins to occur with greater frequency [in the industry] over the course of the next few years,” Neave said.

Having the brand assume SouthEast Waffles has precedence.

In September 2008, Tampa-based Northlake filed for bankruptcy protection. On Feb. 4, Waffle House, under the subsidiary East Coast Waffles LLC, took over Northlake’s 121 restaurants and more than 3,000 employees.

Northlake had been a franchisee for 40 years and had exclusive claim to Virginia. Northlake filed for bankruptcy in September with 146 restaurants in Virginia, Georgia and Florida, and promptly closed 25, including a handful of locations along Interstate 285 in Atlanta.

Northlake’s largest shareholder had been William Johnson, a founder of The Ritz-Carlton Hotel Company LLC, who was accused in shareholder lawsuits of pulling $17.5 million out of the business to pay for a Buckhead office, aircraft and unrelated businesses.

Though the bankruptcy has been settled, lawsuits filed against Johnson by Waffle House and others are still being contested.

“[Northlake] was in such a dire situation that I think most of the parties involved … had a sense that if something didn’t happen quickly they’d run out of money and wouldn’t have been able to make payroll,” Waller said.

Lenders, he said, “weren’t lining up to lend and investors weren’t lining up to invest” in the stores, and the company’s 3,000-plus employees would have been left without jobs.

The former Northlake stores were all in good markets and have the potential for long-term profitability, Waller said. In fact, he said, the East Coast Waffles subsidiary turned a profit in its first month of ownership.

East Coast Waffles took ownership of 116 units, has reopened three shuttered stores and plans to restart three more.

At a glance
Waffle House Inc., which took over 121 restaurants owned by a failed franchise in February, could be called on to assume more than 100 units in Tennessee, Kentucky and Mississippi.

Waffle House restaurants: About 1,600

Corporate-owned: 921 (including 121 former franchise locations and four new stores)

Headquarters: Norcross

Founded: 1955

Founded by: Joe Rogers Sr. and Tom Forkner

Reach Trubey at moc.slanruojzib|yeburts#moc.slanruojzib|yeburts.


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