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Sbarro Emerges from Chapter 11

Mama Sbarro, Theater District, New York City
Time's Square Mama Sbarro's, New York City. photo/Vincent Disjardins

MELVILLE, N.Y. — Franchisor Sbarro, Inc and its domestic subsidiaries announced late Monday afternoon that it has successfully emerged from Chapter 11 with a reduction in debt, an infusion of $35 million in capital and a plan of reorganization.

Private equity firm MidOcean Partners, which bought the franchising firm of one thousand outlets, half franchised and half company-owned in 2007, filed for bankruptcy in April of this year.

"As Sbarro emerges from Chapter 11 today we are a stronger, better capitalized, and more competitive company with a solid financial foundation for future growth," said Nicholas McGrane, Interim President and Chief Executive Officer of Sbarro. "Our reorganization plan eliminates more than 70 percent of our debt, and provides access to $35 million in fresh capital from our new ownership group."

Quiet Franchisees

Franchisees under the Sbarro brand do not have an independent association. The chain's franchise owners have stayed fairly quiet during the bankruptcy of their franchising company.

Peter Silverman, a partner with Ohio-based law firm Shumaker, Loop & Kendrick thinks that this is a recipe for trouble. He most recently helped franchise owners under the Bennigan's brand when their franchisor suddenly liquidated. The missing customers, vendors and support caused by their franchisor's collapse crippled the restaurant owners.

Silverman thinks that franchisees have more leverage than they might realize. "Franchisees have leverage to actively participate as a major player because the franchise agreements are the debtor's primary asset," he says. "Existing creditors and any prospective purchaser or lender need to assess the true business value of the franchise agreements."

"An organized franchisee group should get a prominent seat at the bankruptcy negotiating table," observes the mediation expert.  That is because franchisees' interests differs from that of creditors, who simply seek maximum payment on past debt. "Franchisees' interests may also differ from post-discharge management and owners, who might look to unfairly squeeze franchisees for higher future profitability."

Need for the right management

Restaurant analyst and principal of Pacific Management Consulting Group John Gordon has been watching Sbarro. He estimates that private equity firm MidOcean has retained its controlling share of the company. "I'm glad to hear about the company receiving $35 million access to new capital," he states. He thinks that capital was sorely needed. "But I don't see all the signs necessary to turn this company around," he observes. His concern is the minor reorganizational changes to the company's leadership. "The Sbarro family and management was extraordinarily slow to react to the changes in market," he says. He stresses how food courts in malls have changed these past two decades without Sbarro adapting. "Only in 2011 did the company experiment with a new prototype," observes Gordon about the resistance to change within the company. "The right management must be in place in order to modernize a unit-level change of restaurants and menu items."

Silverman agrees that the main goal for franchise owners is to help engineer a franchisor that emerges well-financed and with the best management as possible. This can be an opportunity for franchisees in that sometimes franchise owners collectively have more aggressive goals that they want to negotiate through their independent associations — such as ownership interest and a strategic say with the franchising company, or leadership in the brand's purchasing or advertisement functions.

Regarding the firm's re-emergence from bankruptcy, Sbarro's CEO declares that many parties have supported the company. "With the support of our investors, vendors and landlords, and the hard work of our valued employees and franchisees, we are pleased that Sbarro has successfully navigated this process in a relatively short time period while operating our business as usual and without interruption," he states. McGrane adds, "Our business is performing well, and as we enter our busiest period of the year, we look forward to building on our positive momentum and continuing to deliver great food and service to our customers."

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About Don Sniegowski

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.