O’Briens in a real pickle

…O’Briens holds the head leases on most of the 85 stores around the country, and then sub-leases the locations to individual franchisees…However, with many locations struggling to pay their rents, this has left Sweeney and his franchise seriously exposed. Ten stores have shut down in recent times and the locations are vacant, but O’Briens is still liable to pay rent, insurance charges and rates for the vacant properties, although they are not generating any income.

Irish Business News
July 12, 2009

O’Briens in a real pickle
Ian Kehoe

High Court documents reveal the extent of the financial problems that have befallen Brody Sweeney and his company O’Briens Sandwich Bars in recent months

O’Briens Irish Sandwich Bars should be celebrating its 21st birthday this year. Instead, the sandwich franchise established by entrepreneur Brody Sweeney is fighting for its survival.

Unable to pay its bills and laden down with liabilities of €6.4million, the chain last week asked the High Court for protection from its creditors.

The court appointed Grant Thornton accountant Paul McCann as examiner. He now has 100 days to devise a rescue package to save the business, which comprises 85 franchised stores across Ireland, employing more than 800 people.

The appointment of an examiner comes just weeks after an administrator was appointed to the British arm of the business, while a number of rebel franchisees in Ireland are now refusing to pay their fees. In the space of three weeks, Sweeney’s business empire has come tumbling down around him.

High Court pleadings state that the company has been forced to write down its investment in its British operation to zero as a result of the administration process. This affected the solvency of the Irish headquarters.

Bank of Ireland is owed €3.4million, while trade creditors are owed €2.4million.The Revenue Commissioners are due some €206,000. The company has assets of €2.2 million, leaving it with a deficiency of €4.1 million.

Individual franchisees are not subject to the examinership period. However, if the examiner fails to save the business, one of the country’s most iconic and prominent brands will disappear from the high street.

The company was a pin-up of Celtic tiger Ireland, rapidly expanding both at home and abroad over the past decade.

The franchise now has more than 220 stores in 13 countries, across Asia, the Middle East and North America.

Investors were wooed by the business and by Sweeney, who previously ran unsuccessfully for Fine Gael as a general election candidate.

In May 2000, the company raised €2.1 million from clients of Merrion Stockbrokers and Bank of Scotland (Ireland), valuing the company at €15 million.

Sweeney has since bought out the bank, but Merrion remains on the shareholder register, along with serial investor Tom Jones and several senior staff.

The recession and the decline of consumer spend hit the company hard. Last November, two years after he stepped down as chief executive and became company chairman, Sweeney returned to the chief executive’s desk. But even the return of the company founder was not enough.

High Court documents obtained by this newspaper reveal how the company has ended up in this situation, and also outline what McCann, a corporate restructuring specialist, will have to do to save the franchise from liquidation.

According to an independent accountant’s report, prepared by KPMG accountants and submitted to the High Court late last week, the company has suffered from a significant downturn in its business over the last 12 months as ‘‘economic conditions have deteriorated’’.

The report states that the company lost €593,000 last year, the first time in more than a decade that the business had failed to generate a profit.

Turnover at the parent company dropped by 11 per cent to €3.6 million last year, while individual shops also suffered falls in sales and profits. This year, things have worsened.

‘‘Customer numbers reported by franchisees have dropped significantly, and franchisee turnover has dropped by a further 18 per cent in the first six months of 2009,” said the independent accountant’s report.

The slowdown in franchisee sales has had a marked impact on Sweeney’s master franchise. Under the terms of the agreement, franchisees pay Sweeney’s company a fixed percentage of turnover in return for use of the brand and a range of marketing and promotional activities.

For the first five months of the year, the parent company generated revenues of just €785,000 and has recorded a loss of €39,000. ‘‘The revenue stream has reduced substantially with the downturn in business,” the report stated.

Much of O’Briens’ difficulties stem from leases. Unusually for a master franchise, O’Briens holds the head leases on most of the 85 stores around the country, and then sub-leases the locations to individual franchisees.

The idea is that O’Briens can negotiate a better deal and secure better locations, given the strength of the brand.

However, with many locations struggling to pay their rents, this has left Sweeney and his franchise seriously exposed. Ten stores have shut down in recent times and the locations are vacant, but O’Briens is still liable to pay rent, insurance charges and rates for the vacant properties, although they are not generating any income.

‘‘The total cost in respect of those ten vacant stores is €483,000,” the report stated. Furthermore, two ‘‘onerous leases’’ have annual rent of €176,000 and are currently in arrears of €72,000.

‘‘Difficult trading conditions for franchisees have meant that some franchisees are unable to pay rents due to their sub-leases to the company. However, the company has remained liable to pay original rents to the landlords under its head leases obligations,” said the report.

As things stand, nine under performing units have rent arrears of €276,000.Of the remaining 54 Irish leases, 33 are in arrears on rent payments.

The company has also experienced similar problems with its British division. The Dublin headquarters has guaranteed a total of 46 properties’ leases for its British subsidiary, O’Briens Irish Sandwich bars (UK), which has been in administration since June 17.

The administration process triggered a contingent debt owed by the Irish company arising from guarantees it had given on leases.

To date, two guarantees, totalling stg£108,000, have been called on, and the Dublin business is not in a position to pay up.

The report also outlines what steps the franchise will have to take to stay in business. The first task is dealing with the rent and lease situation.

The company expects nine stores will close in the near future.

‘‘These units are unprofitable, the franchisees are keen to exit and there are currently rent arrears of €276,000 on these units. If acceptable revised terms cannot be reached, the leases need to be repudiated,” the report states.

The report said it was also ‘‘critical’’ that the leases on the ten vacant stores be repudiated.

Crucially, the company is also seeking to change the nature of its lease agreements with the remaining franchisees. Rather than hold the head leases and sub-lease the outlets, the company now wants to assign all of its leases to the franchisee.

Negotiations will begin immediately in this regard.

The examiner, McCann, is also seeking fresh investment from existing or new investors - or a combination of the two. This money will be used to offer a dividend to creditors, who will be asked partially to write down their debts.

The report states that the future of the company depends on two other factors - continued support from Bank of Ireland and the continued support of the company’s franchisee network. The company’s future projects are based on the continued payment of royalties from two-thirds or more of the existing franchisees.

All going to plan, the company will not open any new stores from September 2009 to August 2010 (year 1).The following year, year 2, it expects to open two new stores in Ireland.

‘‘Revenues from franchisee fees in Ireland [are] projected to reduce by 20 per cent on 2008 figures in year 1 and [are] assumed to remain at year 1 levels in year 2, with a 10 per cent increase forecast in year 3,’’according to the independent accountant’s report.

I f al l these things can be achieved, KPMG stated, the business could be saved.

‘‘In our view, the company has a fundamentally sound business, with income before exceptional items and rent on unoccupied properties consistently showing profits,” the report stated.

‘‘This process will allow the company an opportunity to readjust its business in line with best practice and eliminate the burden of onerous leases, a factor which is fundamental to the company’s current difficulties.”

Having built the business and the brand over the past two decades, Sweeney will be hoping that KPMG is proved right.

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