Round Table Pizza franchisees investigate Fat Brands’ use of marketing funds after the chain loses advertising for months

Round Table Pizza franchisees say their sales fell after the company stopped advertising. | Photo: Shutterstock.

A group of franchisees for Fat Brands-owned Round Table Pizza is investigating the company’s use of its marketing fund and transfers to the parent company after a missed vendor payment left the chain without advertising for several months this year.

The Round Table Owners Association is also investigating accounting issues related to rebates from vendors. That includes rebates due operators from its contract with Pepsi, which are supposed to be held in an escrow account and distributed to franchisees every quarter. But operators said they haven’t received their rebates from that account since the third quarter of last year.

The questions come as operators say their sales and profitability are in decline. The brand’s same-store sales have declined for eight straight years, the association said, and store-level profitability is down 50% since 2017.

“Substantial concerns have arisen as to the misuse of advertising and marketing funds as a result of learning that a $14 million ad fund has been unable to timely pay marketing vendors’ invoices, causing a disruption in advertising placement for several months,” Robert Zarco, general counsel for the association, said in an interview. He has been hired to investigate the issue.

The association is seeking an analysis of the ad fund to determine how it was used from 2022 through 2024.

“In general, Fat Brands declines to comment on franchisee matters or pending and/or threatened litigation,” the company said in an email statement. “As a publicly traded company, Fat Brands follows [Generally Accepted Accounting Principles] standards in all financial reporting and files quarterly and annual reports with the SEC. These filings are subject to rigorous external oversight and compliance requirements.”

On the Pepsi contract, the company said, “Round Table Franchise Corporation continues to honor its obligations and is current on Pepsi rebate payments to Round Table Pizza franchisees.”

Round Table Pizza was founded in 1959. Franchisees operate each of the chain’s 391 locations, largely on the West Coast, though they have closed more locations than they’ve opened in the past five years.

The company filed for bankruptcy in 2011. The chain recovered afterward, with growing same-store sales, until its 2017 sale to Global Franchise Group, which had been acquiring several franchise brands. Same-store sales have declined since then, the association said.

Fat Brands bought that parent company in 2021, part of an aggressive buying spree. The Beverly Hills, California-based brand collector made several acquisitions over a 12-month period, all of them financed through securitization financing.

That has left the company deeply in debt. Fat Brands has $1.2 billion in long-term debt. Interest payments on that financing totaled nearly $35 million last quarter, contributing to a $54 million loss in the period.

Fat Brands has been controversial. The U.S. Department of Justice dropped tax charges against CEO Andy Wiederhorn earlier this year. Wiederhorn had stepped down as CEO during the investigation but last year was paid a $6.3 million consulting fee by Fat Brands.

A website created by an unknown user is seeking stories from unpaid vendors of Fat Brands. Efforts to reach that group or verify the website were unsuccessful.

Round Table Pizza is not the first Fat Brands franchise system to accuse the company of misusing the marketing fund. Franchisees of Hurricane Grill & Wings earlier this year filed a lawsuit against the company accusing it of raiding the marketing fund and damaging the brand.

At Round Table Pizza, operators learned of problems with marketing in April when they noticed local television ads, which the company has run for years, had abruptly stopped appearing. Round Table apparently missed payments to the company that places the chain’s advertisements. The ads stopped March 27.

The television ads resumed July 7 for three weeks but stopped again and haven’t returned. “You need the linear TV presence,” Jeffrey Acton, a 44-year franchisee of Round Table and chair of the franchise association, said in an interview. “They had been running as a matter of course and then they stopped without any notice. At the end of April we’re like, ‘Where’s the TV?'”

Round Table’s Google search ads, which had been in place for years, also stopped March 27. Those ads did eventually return Aug. 25, Acton said.

For franchisees, the loss of marketing hurt. “There was a drop in sales in May, June, July and August,” Acton said.

The loss of advertising has raised concerns among franchisees about the use of the marketing fund.

Franchisees contribute 4% of their sales to a marketing fund, which is supposed to be used to advertise the brand. The Round Table association is questioning the use of those funds. In 2022, for instance, Fat Brands acknowledged it used $800,000 in Round Table marketing funds to pay for a company convention that the association argues was aimed at selling franchises.

The association also is questioning the manner in which the fund is used for accounting, which Zarco argues is giving Round Table the ability to collect a higher rate of rebates from vendors.

Vendor rebates are contentious in franchise systems. Vendors will frequently send funds back to brands. Systems typically use those funds to defray the cost of operating the supply chain, but they can become a profit center for franchisors. Vendors often raise their prices based on those rebates, which can hurt operator profitability.

In 2021, Round Table began including ad spending in the company’s profit-and-loss statements, according to the company’s franchise disclosure documents. Ad fund dollars are classified as revenues, which last year totaled $16.2 million. “Ad funds are intended for marketing,” Zarco said. “Never in the industry has it been considered to be part of gross revenues.”

According to Zarco, reclassifying those funds enables Round Table to collect more in rebates because the company’s franchise agreement limits such rebates to only 3.8% of “gross revenues.” Round Table collects about the same in ad funds as it does in royalties, so the reclassification enabled the company to double the rebates it collects.

Last year, for instance, Round Table generated $1.2 million worth of rebates, or 3.5% of its revenues, including the ad fund dollars, according to the franchise disclosure document.

The association also is looking into issues around what funds are sent to Round Table’s parent company.

Starting in 2021, Round Table’s balance sheet began to include a line item known as “due from affiliates.” That amount started at $3.5 million in 2021 and ballooned to $22 million the next year. By the end of 2023, it was $40.9 million.

Last year, however, transfers from Round Table to Fat Brands and other affiliates were determined to be “permanent in nature” and the company forgave what had become nearly $57 million. That represents the vast majority of the $68.7 million in franchise revenue — not including ad fund dollars — that Round Table generated over those four years.

“They emptied out every dollar that Round Table received and took it out of the company,” Zarco said.

Earlier this year, Round Table officials skipped the franchise association’s annual convention. Then the company abruptly stopped working with a trio of committees with whom it had worked for 35 years. According to Acton, Round Table cited the need for “new and diverse perspectives.”

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