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Friday, Mar 29, 2024

Burgerim’s Breakdown

Fast-casual dining sensation Burgerim appeared to be one of the restaurant world’s most extreme overnight success stories, with hundreds of locations open in more than 35 states in just a few years. But last fall, out of the blue, the company’s owner and entire corporate branch seemed to mysteriously walk away without explanation, cutting off support and leaving restaurant operators to fend for themselves. Today, with dozens of bankrupt franchisees and lawsuits in its wake, the Calabasas brand faces a murky future. David Levaton, an attorney at Franchise Legal Support in Westlake Village, called Burgerim “one of the biggest failures in franchising … in the last 10 years.” Levaton has represented several Burgerim franchisees since the company’s arrival in the United States in 2016 and picked up several more as clients when corporate operations began to break down last year. “This is a huge case,” Levaton said. “There are dozens upon dozens of franchisees that have been left in a lurch. And not just people looking for refunds (on franchise fees). It’s people with stores in construction, people who can’t open because they can’t get final training or approvals from corporate.” Burgerim – which translates to “burgers,” plural, in Hebrew – lets customers build their own hamburgers from 11 types of miniature patties, sold in twos or threes. In addition to the traditional beef patty, the restaurant’s menu boasts lamb, chicken, salmon, vegetarian and specialty options such as spicy Merguez beef and Wagyu. Customers adorn these sliders with a variety of add-ons, condiments and seasonings. Single burgers cost $6.99, while combo plates with two or three burgers are $9.99 and $12.99, respectively. The company was founded in Israel in 2011. Its business rights were later acquired by Israeli restaurateur Oren Loni, who brought it to the United States and established its headquarters in Encino. Early iterations of the chain showed promise, and executives launched an ambitious growth-by-franchise strategy. “I saw them at a franchise expo in Long Beach,” said Levaton. “They had what looked like a good concept. … The food was good. In the beginning, things looked good.” Just three years after entering the U.S. market in 2016 with a debut location on L.A.’s Melrose Avenue, Burgerim boasted almost 300 restaurants in 39 states – unprecedented growth for such a short time. “We’re able to go into smaller spaces where occupancy costs are quite a bit lower,” said Burgerim’s former Chief Executive Tom Meiron in a 2018 interview with the Business Journal. “We don’t need a 3,000 or 4,000-square-foot space with a drive-through. We’re in neighborhood locations.” But the expansion model was aggressive to a fault. According to a three-part report published in February by trade publication Restaurant Business Online, Burgerim had sold franchises to anybody who could pay the $50,000 franchise fee, regardless of their experience in the food industry, their qualifications as business operators or the viability of their proposed locations. Google Maps lists more than 15 Burgerim stores in the Valley and adjacent communities, including locations in Van Nuys, Northridge, Woodland Hills, Glendale, Santa Clarita, Ventura, Oxnard, Lancaster, Palmdale and more. The status of those stores is unclear. Locations once open in Burbank, Thousand Oaks and Simi Valley have already closed. Franchisee perspective Joseph McCullough, a franchisee with three Burgerim restaurants in Virginia, told the Business Journal, “There was no corporate support, no corporate marketing and minimal corporate infrastructure.” Without oversight from a corporate structure, according to McCullough, operators were left vulnerable to predatory lending schemes and expensive mandated vending agreements set up by Loni. McCullough, a career restaurant operator, said he shelled out $600,000 to set up his first store using the processes advised by Burgerim corporate, which he considered an absurd overspend. Rather than follow the guidelines for his second and third stores, he went his own route and ended up spending $350,000 each. “Everyone is struggling to break even because costs are so high,” he said. Last fall, it all came crashing down. “Around August or September last year, corporate basically went dark,” said McCullough. “There were no responses, no answers to phone calls, no answers to emails. … We (later) heard the owner skipped town.” With bills to pay and no corporate oversight to speak of, franchisees altered their menus, changed their service styles and, in some cases, even rebranded in attempts to save cash and attract customers. Levaton said many went bankrupt, and more lost tens or hundreds of thousands in invested capital. Dozens filed lawsuits against Burgerim alleging fraud, mismanagement, misappropriation of franchisee funds and unpaid wages. In November, Loni reportedly left the U.S. for Israel. “We all have our lives riding on this,” McCullough said. “Lots of people have lost their (livelihoods) already.” Why Burgerim corporate seized up so suddenly remains a mystery. News of the saga has raised eyebrows in local and federal governments. In January and February, respectively, Maryland and Washington became the first states to suspend Burgerim’s franchise registration rights. And in February, California Sen. Dianne Feinstein sent a letter to Joseph Simons, the chairman of the Federal Trade Commission, asking that the FTC investigate “potentially unfair and deceptive practices by Burgerim.” New leadership In December, Burgerim’s corporate operations broke its silence. It told franchisees it was considering a bankruptcy filing and had hired a team of insolvency attorneys including Michael Jay Berger in Beverly Hills to advise its future. It also announced the appointment of Michel Buchbut, an entrepreneur with experience steering a plastics company back from the brink of bankruptcy, as chief restructuring officer. In a phone call with the Business Journal, Berger said Burgerim will not file for Chapter 7 bankruptcy “under any circumstances.” He said the company is considering Chapter 11 protection from creditors so that it may reorganize and hopefully become financially sustainable. Also possible, Berger said, is an Assignment for Benefit of Creditors, or “ABC,” in which Burgerim’s assets and liabilities are transferred to a law firm which then liquidates the assets and pays back the creditors. ABCs are usually quicker and quieter than bankruptcy filings. As for the company’s operations, Buchbut claimed there has been no intentionally fraudulent activity. “We have 280 stores open, 150 of which are making money. How can we be fraudulent?” he said in an interview with the Business Journal. “A bad operation? Yes. But not fraudulent.” Buchbut insisted that Loni didn’t establish Burgerim to intentionally bilk franchisees – rather, he simply wasn’t able to manage his vision as it grew. “He operated it totally wrong,” Buchbut said. Since taking over, Buchbut has moved the company’s headquarters to Calabasas and, according to Restaurant Business Online, cut down the corporate staff from about 40 employees to eight. Buchbut told the Business Journal “basically 80 to 90 percent of operations” at Burgerim are back up and running smoothly. The last two months, he explained, have been spent implementing regional corporate managers who will connect with franchisees and rework bad agreements by previous management. Franchise operators evidently haven’t been looped in. “There’s a group saying they’re corporate, but we don’t know their legality or legitimacy,” McCullough, the Virginia franchisee, said. “We’ve asked for legal verification. (Buchbut) has provided random documentation that looks to be thrown together at a whim.” In the absence of a corporate structure, franchisees have begun to organize on their own. Franchise operators announced in late January the formation of an Independent Association of Burgerim Franchisees under the umbrella of the American Association of Franchisees and Dealers, a trade advocacy nonprofit based in Palm Desert. The chapter, comprising around 30 franchisees, aims to unite Burgerim franchisees, engage legal counsel and aggregate resources to protect their investments. McCullough is serving as interim chairman of the chapter’s steering committee. The group has already begun negotiating fairer deals with meat and foodstuff vendors, interviewing attorneys and establishing a legal fund, and working to lower overhead costs for existing franchisees. “We’re basically providing the support a corporate system is supposed to,” McCullough said. Future outlook As if Burgerim corporate’s status wasn’t confusing enough, a new Burgerim entity emerged last year. All existing franchise agreements were signed under Burgerim Franchising Group USA, a California corporation founded years ago by Loni. But in June, an entity called Burgerim Group Inc. was formed. Some published reports have posited Loni did this to transfer all the assets from the original Burgerim entity to the new one so it could potentially reorganize and keep operating without all the legal baggage that resulted from the fiasco. That transfer happened in December. Who controls both entities at this point – whether it’s Loni or Buchbut – is not clear. Levaton said an asset transfer could pose problems for franchisees with active claims against Burgerim. “How do you … sue a company that has no assets?” McCullough added the association doesn’t plan to file any lawsuits of its own at this time, but some members are considering a class action suit. Ultimately, the association’s goal is to keep the doors of existing Burgerim franchises open, he said. “We still love the concept and the brand, it was just extremely poorly run,” McCullough said. “If they do prove some legality … we hope to open a dialogue and work with them to make money.” Buchbut said he wants the same future for Burgerim. In making amends with aggrieved franchisees, he claimed that once Burgerim’s business model turns around and begins collecting royalties, he plans to redistribute 25 percent of those royalty collections to active franchisees who lost money with their original deals. “That’s the goal,” he said. If Burgerim collapses for good, Levaton said franchise operators have a few options. “Eventually they may decide to start their own brand. Or someone could buy the brand and trademark,” he said.

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