Report: Franchise Group Paid $5.7 Million in Bonuses Before Bankruptcy

Franchise Group, owner of retailers like Vitamin Shoppe, started off this week by declaring bankruptcy.

But as the company was collapsing, it paid insiders $5.75 million in bonuses to keep them in their jobs, Bloomberg News reported Thursday (Nov. 7).

The report, which cited court documents related to the bankruptcy, said that other key employees not considered insiders split an additional $2.16 million in bonuses, which can be clawed back if the employees or the executives quit early.

Because the payments were made before Franchise Group’s (FRG) Chapter 11 filing, it means they weren’t subject to be reviewed by creditors or regulators, the report said. Bloomberg noted this has become a common move among bankrupt companies, even as critics argue about the optics of rewarding managers of failed companies.

Judges and bankruptcy advisors, however, argue that these payments help keep people with specialized knowledge at these companies, helping creditors recoup more.

FRG announced its restructuring plan Sunday (Nov. 3), along with plans to shutter one of its holdings, furniture chain American Freight.

“Today’s announcement to de-lever our balance sheet is a pivotal step forward in enabling our market-leading businesses Pet Supplies Plus, The Vitamin Shoppe, and Buddy’s Home Furnishings to realize their full potential,” Andrew Laurence, FRG’s president and CEO, said in a news release.

“Each of these businesses has a demonstrated value proposition and provides great products and services to customers, which they will continue to do seamlessly during this process,” he added. “Strengthening FRG’s balance sheet will allow us to enhance our support for these businesses as they advance their growth trajectories.”

American Freight, the company noted, has “struggled due to sustained inflation and macroeconomic challenges facing the large durable goods sector.” Store closing sales were slated to begin at both the company’s website and its stores this week.

Franchise Group went private last year in a $2.6 billion buyout deal led by former CEO Brian Kahn, with the assistance of investor B. Riley.

“We are excited to have this opportunity to continue our business strategy of partnering with high quality franchisees, operators and financial institutions, while also delivering certain value to our public stockholders despite a challenging business environment,” Khan said at the time.

According to the Bloomberg report, two of the company’s lenders — Pacific Investment Management Co. and private equity firm Irradiant Partners LP — are opposed to the bankruptcy plan, as they are owed more than $600 million in second-lien and other debt that they say would be wiped out if the bankruptcy proceeds.