(Bloomberg) -- Franchise Group Inc., the bankrupt brand manager backed by B. Riley Financial Inc., paid insiders $5.75 million in retention bonuses to keep them in place as the owner of Vitamin Shoppe and American Freight was collapsing.
Other key employees who are not considered insiders split an additional $2.16 million in bonuses, which can be clawed back if the employees or the executives quit early, according to a footnote in court documents filed as part of the Chapter 11 case. The filing didn’t name the individual recipients.
The payments were made before Franchise Group, also known as FRG, filed bankruptcy on Nov. 3, which means they weren’t subject to review by creditors or the federal watchdog that oversees corporate bankruptcies. In recent years, bankrupt companies including Armstrong Flooring and Yellow Corp. have used the tactic amid increasing objections from creditors, employees and regulators about the appearance of rewarding managers who presided over a company’s failure.
Retention bonuses are common at foundering companies to persuade key people with specialized knowledge to stay and help clean up its affairs. The logic among judges and bankruptcy advisers is that the payments help creditors recoup more than they otherwise would get if those people left.
Representatives for Franchise Group didn’t immediately respond to a request for comment. B. Riley acquired a minority stake of about 31% in FRG during a 2023 management-led buyout. The bankruptcy is expected to wipe out FRG equity holders, and B. Riley has said it will take writedowns totaling hundreds of millions of dollars on its stake.
Recovery Plan
Franchise Group filed its $2 billion bankruptcy case with a plan for senior lenders, including HPS Investment Partners, Garnett Station Partners, HG Vora Capital Management and Arena Capital Advisors, to take ownership of the business in its restructuring, according to court documents.
Pacific Investment Management Co. and private equity firm Irradiant Partners LP oppose the firm’s bankruptcy plan. They are owed more than $600 million in second-lien and other debt that they say would be wiped out under the lender plan.
Three of Franchise Group’s businesses — Vitamin Shoppe, Buddy’s Home Furnishings and Pet Supplies Plus — will be put up for auction under court supervision, according to the lender-backed plan. Should no qualified bids come in, the lenders would take control of Franchise Group. Discount home furnishings chain American Freight will be shut down.
The case is Franchise Group Inc., 24-12480, in the US Bankruptcy Court for the District of Delaware.
(Updates with B. Riley’s stake in the fifth paragraph.)
©2024 Bloomberg L.P.