Global Franchise Group Acquisition Significantly Increase Unit Count 

FAT Brands is a young company but has developed rapidly since then. FAT Brands began as a holding company for Fatburger in 2017 and expanded through the acquisition of the Johnny Rockets for $25 million in 2020.

Last year, FAT Brands purchased the Global Franchise Group. Before the acquisition, the Global Franchise Group has already operated more than 1,400 franchised and corporate stores in 14 countries. Most of the current brands under the FAT Brands umbrella came from the Global Franchise Group acquisition. Later in 2021, FAT Brands acquired Twin Peaks for $300 million. 

FAT Brands is a company that focuses on restaurant franchising and has a strong pipeline for future acquisitions. FAT Brands focuses on revenue from royalties and franchise fees, rather than from company-owned or operated restaurant locations. 

Beyond their current brand portfolio, FAT Brands is intended to acquire other restaurant franchise concepts that allow them to offer additional food categories and expand their geographic footprint. Additionally, FAT Brands offer its franchisees support in public relations, marketing, site selection analysis, staff training, and more. Although the franchisees appear happy with FAT Brands support, there is a major pending issue at the top. 

Fat Brands CEO Faced Multiple Allegations

Besides operating the company, Andy Wiederhorn, the CEO of FAT Brands, is certainly encountering some troubles. Regarding the pending lawsuits and FBI inquiries into allegations of security and wire fraud, money laundering, and attempted tax evasion, Andy Wiederhorn denied all of the charges and looks forward to the growth of the company. Specifically, the FBI is looking for materials concerning the merger with Fog Cutter Capital Group in 2020, determining whether the transactions between these entities and other benefits received by Andy Weiderhorn or his family.

According to the Franchise Times, the lawsuit accused Mr. Wiederhorn of “running FAT Brands into the ground and bleeding it of its cash.” In 2004, the CEO spent 15 months in prison after pleading guilty to charges of paying an illegal gratuity to an associate and to filing a false tax return years ago. Controlling 55.2 percent of the voting power of FAT Brands’ common stock, Andy Wiederhorn and his sons hold executive positions in the company and receive compensation of $1.08 million, $960,000, and $740,000, respectively. The truth is still unspoken.

FAT Brands Grows Through Global Expansion

In 2020, FAT Brands consisted of 326 franchisees, who operated 679 restaurants. There was a significant increase in the number of franchisees in the fiscal year of 2021. As of 2021, FAT Brands’ franchisee base consisted of 761 franchisees, who operated an aggregate of 2,240 restaurants. FAT Brands started to directly own and operate an additional 129 restaurants. FAT Brands also expanded internationally, with franchised stores in 37 countries including 36 states in the United States. Furthermore, they are targeting further penetration of the Middle Eastern and Asian markets by leveraging the Fatburger and Elevation brands.

Franchise Initial Investments By Numbers

FAT Brands generally provide for an initial franchise fee ranging from $0 to $50,000 per store, and a royalty fee of between 0.75% and 7% of net sales. Additionally, franchisees pay an advertising fee based on net sales for local marketing and brand marketing.

Many of the subsidiaries under FAT Brands have the same initial investment estimates. The ideal candidate should have a net worth of at least $1,500,000 and liquidity of $500,000. They are Farburger, Hurricane Grill & Wings, Ponderosa, Buffalo’s, Elevation Burger, and Yalla.

Round Table Pizza

Marble Slab Creamery

The ideal candidate should have a minimum liquidity of $100,000 and a net worth requirement of $250,000. Normally, once you identify the location and sign the lease, the store can be opened in as little as 90-120 days.

Johnny Rockets

Johnny Rockets was founded in 1986 and has been franchising since 1987. It currently has 340 franchised units operating in 25 countries and 170+ locations in the U.S. The ideal candidate should have a net worth of $1,500,000 and liquidity of $750,000.

Great American Cookies

The ideal candidate should be financially stable, with a net worth of at least $250K and liquidity of $100K per store. The optimal square footage is 1,600 – 1,800 square feet. The franchise fee is $25,000.

Hot Dog on a Stick

The ideal candidate should have a minimum liquidity of $100,000 per unit and a minimum net worth of $100,000 per unit. 

Twin Peaks

The ideal candidate should have a liquid capital (multi-unit minimum 3 to 5) between $1,520,800 – $5,106,500 and a net worth of $5,000,000. 

Pretzelmaker

Native Grill & Wings

The ideal candidate should have a minimum of $1 million net worth and $500,000 liquidity. 

Fazoli’s

The ideal candidate should have a minimum investment capability of $750,000 and minimum liquidity of $250,000. Fazoli’s has different royalty terms than others. There is zero royalty fee in year one, and 3%, 4%, 5% for year two, year three, year 4, and thereafter.

Strengths and Support

By growing rapidly since 2017 through acquisitions and entering new restaurant brands, FAT Brands has its own strengths compared to others in the competitive industries, highlighting its support to franchisees.

FAT Brands maintain an “asset-light” business model requiring minimal capital expenditures by franchising their restaurant concepts to their owner/operators. This franchise model also allows them to scale the number of restaurant locations with very limited incremental corporate overhead and minimal exposure to store-level risk. With less pressure on operational costs, FAT Brands emphasizes providing their franchisees with a host of services, such as public relations, marketing, supply chain assistance, and more, to enhance their financial and operational performance. This organic cycle boosts new store growth and accelerates the financial performance of the FAT Brands network, increasing their franchise fee and royalty revenue streams. 

In addition to the asset-light business model, FAT Brands acquired a variety of strong brands that aligned with their vision, strengthening their brand image. Fatburger, Johnny Rockets, and Buffalo’s have built distinctive brands, providing made-to-order, high-quality food at competitive prices. The Ponderosa and Bonanza brands deliver an authentic American steakhouse experience. Other brands provide services from casual dining and fast-casual settings to family and eco-friendly environments. Moreover, the diverse portfolio allows FAT Brands to cross-sell existing franchisees’ concepts. By offering the franchisees a variety of concepts, their existing franchisees can have the ability to strategically satisfy their respective market demands by incorporating the various concepts into theirs.

FAT Brands’ Preliminary Financials

For the fiscal year of 2021, there was a net loss of $31.6 million consisting of revenues of $118.9 million less costs and expenses of $118.1 million. Similarly, there was a net loss for the fiscal year of 2020, which is a total net loss of $14.9 million, consisting of revenues of $18.1 million less costs and expenses of $34.4 million. 

The primary revenues stream for FAT Brands is royalty payments, franchise fees, and advertising fees. FAT Brands earned revenues of $118.9 million for the fiscal year of 2020 compared to $18.1 million for the fiscal year of 2020. Of the $100.8 million increase, $85.5 million was generated by the 2021 Acquisition Entities. The remaining improvement reflects revenue from Johnny Rockets, which was acquired during the third quarter of 2020. Compared to 2020, there was a significant amount of increase in revenue from royalty payments, franchise fees, and advertisement fees. 

The costs and expenses for FAT Brands increased from $34.3 million in 2020 to $118.1 million in 2021. The costs and expenses consist primarily of general and administrative costs, impairment of goodwill, advertisement fees, and refranchising loss. Specifically, there were a large number of costs and expenses related to the 2021 Acquisition Entities, including costs related to the operations of company-owned locations and the acquisition of Johnny Rockets, and the merger with FCCG. Compared to 2020, there was a significant decrease in refranchising loss, implying a strong recovery from the COVID-19 pandemic.

FAT Brands’ Income Statement Takeaway

By examining the total revenues of the FAT Brands as a company earns across three years, we can see that its revenue increased dramatically from 2020 to 2021, but was negatively impacted by the COVID-19 pandemic in 2020. Moreover, the costs and expenses continued to increase in 2021, including the newly expanded business in company-owned restaurants. The losses in advertisement fees have always been an issue for the FAT Brands since 2019, due to the expensing advertising expenditures in excess of the advertising fees collected from franchisees.  

FAT Brands’ Cash Flows Statement Takeaway

Liquidity is one of the most important measurements of a company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, operations, and expansion of franchised restaurant locations. For FAT Brands, its primary sources of funds for liquidity during fiscal year 2021 was through the issuance of notes. This is an essential indicator for the FAT Brands, as it is involved in a world-wide expansion of franchise locations. 

According to the cash flows statement, the FAT Brands has a $92,710 thousand increase in cash, cash equivalents, and restricted cash. At the end of the fiscal year, their total cash and cash equivalents amounted to approximately $99,921 thousand. Compared to $7,211 as of 2020, there is a significant increase in cash in the fiscal year of 2021.   

In 2021, the net cash used in investing activities was $723.2 million, primarily due to the acquisition of GFG, Twin Peaks, Fazoli’s and Native Grill & Wings. The FAT Brands gained a large amount of net cash from financing activities of $815.2 in 2021, primarily as a result of the whole business securitization transactions.  

FAT Brands’ Risk Factors

COVID-19 Global Pandemic:

Like other businesses, the Franchise Group encounters challenges and uncertainties, even with efforts to address the adverse impacts of the pandemic. Some franchisees are forced to close, or temporarily closed, some retail locations, reduced or modified store operating hours, and adopted a “to-go” only operating model. Due to increasing practices of social distance, there are changes in the behaviors of both customers and employees that are uncertain to the business. For example, the financial condition of the customers can be adversely impacted, resulting in a decrease in the demand for dining outside; the ability of franchisees and employees to operate at store locations can also be negatively affected.

Competition:

As a franchisor, FAT Brands’ main competitors are the competitors of their franchisees. Operating in a highly competitive industry, the franchisees face well-established national, regional, or local franchisors where they operate or where they intend to operate. Additionally, the restaurant industry is often competitive in terms of price, service, location, and food quality. The restaurant industry is susceptible to customer trends, economic conditions, and traffic patterns, with few barriers to entry.

Dependence on Franchisees:

FAT Brands’ restaurants are operated by their franchisees, which makes them highly dependent on the financial success and cooperation of their franchisees. Since the company has limited control over how its franchisees’ businesses are operated, the failure of the franchisees can result in reduced or delayed royalty payments. Moreover, although the franchisees are contractually obligated to operate their restaurants in accordance with the operations, safety, and health standards set forth in the agreement, there are risks that the franchisees will operate on their own, adversely impacting the financials. Meanwhile, disputes with franchisees or dealers can result in financial damages, reputation degradation, and loss of prospective franchising opportunities.

Cybersecurity:

Similar to other businesses, FAT Brands heavily depends on information technology systems, including a franchise reporting system, by which their franchisees report their weekly sales and pay their corresponding royalty fees. This leaves them susceptible to cyber-attackers and terrorist attacks, which can severely interrupt their everyday business operation and degrade their reputation.

Conclusion

Overall, it is hard to determine whether FAT Brands is a profitable company. Although expanding internationally and acquiring new restaurant brands, the increasing revenues fail to offset the increasing costs and expenses. Its franchising business model is susceptible to the COVID-19 pandemic and the performance of each individual franchisee, where its financials are adversely impacted. Although its revenues and cash flows indicate a strong recovery from the COVID-19 pandemic, its losses continue to grow. One important thing to note is that, with accruing losses, the FAT Brands is still expanding by acquiring new brands and opening new restaurant locations. On the other side, FAT Brands has generated a significant amount of cash in 2021, strengthening its ability to negate the impact of the pandemic and continue to recover from the losses.