Bitter Lessons from the Collapse of the Franchise Group

The collapse of the Franchise Group has caused considerable turmoil at the investment firm B. Riley Financial and deeply shaken co-founder Bryant Riley. After the Franchise Group, in which Riley invested a significant stake a year ago, filed for bankruptcy, his firm is facing a further loss of $120 million. The investment was originally part of a $2.8 billion deal that Riley himself had arranged, which emerged as one of the central commitments of his firm. With a shareholding of about 31% in the Franchise Group, B. Riley found itself in a difficult position following the bankruptcy, especially since this stake was largely pledged as collateral for the company’s lenders. The bankruptcy led to the complete elimination of the Franchise Group's equity capital and at the same time a significant depreciation for the Los Angeles-based investment firm. The bankruptcy of the Franchise Group, which operates brands such as Buddy's Home Furnishings and The Vitamin Shoppe, marks a dramatic turn for Riley and his once close partner Brian Kahn. Kahn, who was instrumental in the privatization of the Franchise Group, was forced to resign amid a criminal investigation due to a separate hedge fund collapse with which he was associated. Riley described the circumstances leading to the current crisis as a "confluence of events" that undermined his original investment strategy. In particular, the decline in consumer spending and uncertainty due to the hedge fund scandal heavily burdened the commitment. In light of these developments, B. Riley saw its shares plunge by 86%, suspended its dividend, and began selling assets to reduce debt.