Max & Erma’s, a 106-unit casual-dining chain in the Midwest, has filed for Chapter 11 bankruptcy protection to restructure its debt, part of which is guaranteed by sister company Damon’s Grill, a 50-unit barbeque chain.
A deal to get Max & Erma’s through Chapter 11 could include a refinancing of about $16 million in debt, which officials said could be done as early as this week, or a plan to restructure through the sale of corporate restaurants to franchisees, which could take months.
Max & Erma’s and Damon’s, which are both based in Columbus, Ohio, are owned by G&R Acquisitions Inc., a Pittsburgh-based firm led by restaurateur and developer Gary Reinert Sr. Last year he purchased Damon’s for an undisclosed sum, and Max & Erma’s, which was then a public company, for about $10 million.
Tracy Coats, a consultant to Reinert who spoke on his behalf, said Reinert bought Max & Erma’s, with 79 corporate locations and 27 franchised units, when the chain already had defaulted on a $23 million loan from National City Corp. Reinert had planned to sell the corporate Max & Erma’s locations to franchisees and had commitments “in excess of $25 million,” which would be used to pay down debt, Coats said.
Reinert told National City, which held a lien on the company, that those sales would allow him to repay the debt, and he offered stock in Damon’s as a guarantee, Coats said. However, the economic collapse that began last fall dried up funding for many of the franchisees who had agreed to deals, “so Reinert couldn’t meet his [debt] obligation,” Coats said.
“The [Max & Erma’s] stores themselves are healthy and cash-flow [positive],” Coats said. “But when you owe $16 million, I think you can kind of see yourself what happened.”
According the Pittsburgh Business Times, National City Corp., which was acquired last year by PNC Financial Services Group Inc., has secured a $15.9 million judgment against Reinert and his companies.
According to court documents, Max & Erma's has both assets and liabilities of between $1 million and $10 million, and its five largest creditors are GE Franchise Finance of Scottsdale, Ariz., which is owed $1.7 million; the Ohio, Pennsylvania and Michigan treasuries, which are owed $1.1 million, $300,000 and $190,000, respectively, in taxes; and Engineering Excellence Inc. of Cincinnati, for $97,705.
Coats said a number of interested parties were looking at refinancing Max & Erma’s, but he did not provide details on the suitors. Coats added that a refinancing deal could close as soon as this week. In the meantime, he is working with Reinert to assess corporate restaurants for possible closures, which could include an estimated eight to 14 underperforming locations.
“There are some stinkers,” Coats said. “They were never profitable.”
He noted that some of those stores pay $30,000 to $40,000 a month in rent, but do only $900,000 to $1 million in annual sales.
“So those restaurants will go away or [their leases will] be renegotiated,” he said. “Then we’ll have a slightly leaner chain that will be in the hands of owner-operators.”
He estimated that the whole process of closing underperforming units and selling the others to franchisees would take between six months and nine months.
“We do have a positive-cash-flowing restaurant system. We just need some breathing room from the defaulting paper,” he said.
Damon’s Grill also is undergoing restructuring. The number of locations has shrunk from 80 last year to 36 franchised units and 13 corporate restaurants, following the latest closures of two units in the Columbus area this month.
Contact Bret Thorn at [email protected].
