When a company operates on a franchise model, it takes on a level of risk.
The model is a positive in that the business can expand without the company spending capital. But the risk is that your franchise operators can damage your name.
Every franchise operator has some level of vetting operations when it comes to picking the people who will license the brand. Generally, a potential operator must meet certain net-worth and operating-capital requirements.
💵💰Don't miss the move: Subscribe to TheStreet's free daily newsletter 💰💵
Those rules do not fully protect the parent company. A franchise operator can make poor financial choices or simply come up against unexpected economic situations.
When that happens, the core brand might be damaged because consumers don't necessarily understand the franchise model. If customers visit a pizza chain and have a lousy pie because the operator cut back on the cost of the ingredients — which would violate most franchise agreements — most would blame the brand, not the local operator.
Related: Distressed iconic food brand files for Chapter 11 bankruptcy
A struggling franchisee can reflect badly on the brand and lead to problems that the parent can''t control. Even revoking a franchise license can lead to an ugly court fight.
That's part of the story as a franchisor of Jack in the Box's (JACK) Del Taco brand has filed Chapter 11 bankruptcy, which has now led to the closing of 18 restaurants.
Image source: Del Taco
18 Del Taco locations closed
Newport Ventures, a Del Taco franchise operator in Colorado, filed for Chapter 11 bankruptcy protection last October.
The bankruptcy petition for the company showed assets in the range of $10 million to $50 million with liabilities in the same range. Newport Ventures reported that the number of creditors ranged 100 to 199.
Newport Ventures also said that it did not expect that assets in the estate would be sufficient to make a payment to unsecured creditors.
The franchise operator filed for Chapter 11 bankruptcy protection after Jack in the Box terminated its license to operate its Del Taco locations.
Newport Ventures bought 18 Del Taco locations for $14.1 million in 2023 and borrowed $11.8 million to fund the purchase and remodel some locations. The franchisee also agreed to add 10 more locations, according to court documents.
More Food News:
- McDonald's, Starbucks targeted by rival fast-food chain's takeover
- Popular retailer unveils affordable line with unexpected brand
- Oreo celebrates 113th birthday bringing back fan favorite
That did not happen as Newport Ventures ran into financial problems, some of which it blamed on Jack in the Box, and fell behind on its payments to the franchisor.
The parent terminated its license to operate its 18 Del Taco location roughly a year after the original purchase, and the outlets remained open under a provision of Newport Ventures' Chapter 11 bankruptcy filings.
Those 18 locations have closed, leaving Del Taco with a single location in Colorado.
Del Taco parent calls closures 'temporary'
Jack in the Box has called the closures "temporary" and said it expected the 18 closed Del Taco locations to reopen "as soon as possible."
“At this time, our Denver and Colorado Springs franchise locations are temporarily closed," the company told Restaurant Business Online. "We will reopen these locations as soon as possible and will share updates as they become available,”
The Del Taco brand has been struggling in general, with comparable sales dropping by 4.5% in the fiscal first quarter ended Jan. 19.
Related: Popular burger chain closing dozens of restaurants
"For Del Taco, it was another challenging quarter with pressured same-store sales results, and Del is also expected to post negative same-store sales in the second quarter," Jack in the Box Chief Financial Officer Jack Tucker said during the earnings call.
"With that said, we have seen an encouraging start to the menu-optimization initiative, which rolled out systemwide in the middle of the first quarter and has driven higher attach rates and better average check."
Still, the chain has a strong footprint and expects to add new locations in 2025.
"Del Taco restaurant count at quarter-end was 589 with one opening and six closures during the quarter," Tucker added. "Del Taco expects to be within our original guidance of opening 15 to 20 restaurants this fiscal year. We refranchised 13 restaurants in the first quarter, bringing Del Taco to approximately 80% franchise-owned."
Related: Veteran fund manager unveils eye-popping S&P 500 forecast
