The years-long investigation into FAT Brands chairman Andy Wiederhorn and his company continues, though the situation doesn’t appear to be impacting franchisees and it’s unclear if it will affect a potential Twin Peaks public offering.
The U.S. Securities and Exchange Commission and the U.S. Department of Justice charged FAT Brand’s former CEO in May, claiming Wiederhorn misappropriated company money for personal expenses. Wiederhorn, who remains company chairman, and others were criminally indicted in Los Angeles by a federal grand jury for tax evasion, wire fraud and other counts.
From what I’m told, these charges aren’t bothering franchisees or impacting their sales. It’s important to note FAT Brands provided me with these franchisee comments. None of the 10-plus franchisees I contacted agreed to an interview.
“Sales at our locations remain strong as the general consumer is focused on the food itself and the experience—not outside noise,” Fatburger franchisee Spike Garcha wrote. “We look forward to continuing our long, fruitful relationship with the FAT Brands team.” Garcha signed a 14-unit development deal in 2022 in Florida.
“I have seen it all—the beginning of the acquisition activity, the formation of FAT Brands, FAT Brands going public, and so on,” wrote Frank Di Benedetto, CEO of FDF Restaurant Brandz, which started in 2005. “I respect what FAT Brands has built under Andy’s leadership and I am proud to be a Fatburger franchisee.”
Funding a ‘lavish lifestyle’
The gist of the parallel investigations is Wiederhorn received $47 million in distributions that were recorded as shareholder loans and subsequently forgiven, in order to evade personal income taxes. Former FAT Brands CFO Rebecca Hershinger and Wiederhorn’s tax adviser, William Amon of Andersen, were also criminally charged.
In 1998, Wiederhorn founded Fog Cutter Capital Group. He started subsidiary FAT Brands in 2017. Fog Cutter owned 80 percent of FAT’s shares and the two entities merged in 2020.
FAT Brands issued a $30 million promissory note to Fog Cutter after Fog Cutter transferred ownership of Fatburger and Buffalo’s Cafe (FAT’s only two brands at the time) following the 2017 IPO. The $30 million was paid off by September 2018, according to court documents, but Wiederhorn allegedly continued transferring “millions of dollars” to Fog Cutter. The SEC alleges FAT Brands loaned Fog Cutter $28.3 million between July 2018 and December 2020, about $20 million of which was used to fund personal cash transfers to Wiederhorn.
“These transfers included payments for private jets, first class airfare, luxury vacations, Wiederhorn’s mortgage and rent payments, and nearly $700,000 in shopping and jewelry,” the government alleges
Wiederhorn, the subject of a Franchise Times cover story in 2018, pleaded guilty in 2004 to federal tax charges involving another company he ran, Wilshire Credit Corp., and spent 14 months in prison.
Wiederhorn’s attorney, Doug Fuchs, said his client had a “legitimate shareholder loan agreement with Fog” since 2010. In 2018, “Fog entered into a new shareholder loan agreement with Mr. Wiederhorn on the same terms. FAT was not a party to and was not otherwise involved in these shareholder loan agreements,” which were disclosed to investors, Fuchs said over email.
Fuchs says the promissory note was “extinguished at the demand of a third-party lender” in 2018. Fog Cutter apparently agreed to trade the outstanding balance for FAT stock so FAT could purchase Hurricane Grill & Wings. From 2018 to the 2020 merger, FAT loaned money to Fog Cutter, Fuchs said. “The intercompany loan proceeds were used to help pay Fog’s debts and fund the shareholder loan between Mr. Wiederhorn and Fog,” he wrote.
FAT Brands declined to comment on the charges.
Potential overhang
Twin Peaks, one of FAT’s 16 brands, is exploring an IPO. The impact of FAT’s and Wiederhorn’s legal mess on the valuation is unclear.
“The overhang because of Andy might be best defined as the unknown, in terms of if Andy is found guilty, what happens to FAT Brands’ capital structure,” said John Gordon, a restaurant analyst at Pacific Management Consulting Group. “There’s a complicated capital structure of loans that has fueled the growth of FAT brands, really starting during the pandemic.”
Twin Peaks CEO Joe Hummel told Franchise Times in June the brand is “unaffected” by the legal issues. “We are very siloed and pretty much stand on our own as a company without shared services,” Hummel said. “Because of that we have been able to operate successfully with the platform above us but really on our own.”
Prior to the charges, Gordon said he was unaware of “all of this internal money being shifted back and forth to Fog Cutter.” He continued, “What I could gather is that there’s a lot of debt supported by the EBITDA. So the goal of this IPO is to sell it and then to take the proceeds, or at least most of the proceeds, and then to pay down debt. And that’s a very solid financial strategy.”
Brand leaders often do a “road show” prior to an initial public offering “to display the wares of this new IPO,” Gordon said. “Is Andy really going to feel comfortable going out on a big road show given his current status? That’s what I see the issue to be, but most of the attention will be on the quality of the earnings to date.”
Wiederhorn did present June 27 during a virtual equity conference hosted by investment bank Noble Capital Markets. The company, he said, is on track to do about $2.5 billion in systemwide sales across all its brands this year, and “we hope to see Twin Peaks as a public company at the end of the summer.”
FAT Brands’ stock price fell from $7.58 May 9, the day before charges were made public, to $5.42 May 10—a 28 percent decrease. Share price varied through mid-July, but stayed below the May 9 high.
What comes next? Federal prosecutions aren’t known for their speed. Wiederhorn noted in his Noble presentation he doesn’t expect a resolution with the SEC until 2025 or 2026. That’s a sizeable shadow being cast over Twin Peaks’ potential valuation and FAT Brands as a whole.
Emilee Wentland is managing editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to ewentland@franchisetimes.com.