Acquisition of a struggling Chicago market sends a Freddy’s franchisee into bankruptcy

A Freddy’s Frozen Custard & Steakburgers operator landed in bankruptcy and closed 11 locations. | Photo: Shutterstock.

Freddy’s Frozen Custard & Steakburgers four years ago approached one of its better franchisees, M&M Custard, with a proposition: Take over the struggling Chicago area market and turn it around. The operator jumped at the opportunity. 

The deal turned out too good to be true.

Last week, M&M Custard declared bankruptcy after closing those 11 Illinois locations, citing the market’s persistent challenges, negative EBITDA, or earnings before interest, taxes, depreciation and amortization, and the state’s tax and regulatory burden.

The franchisee has opted to move on with its 31 profitable locations outside the market.

“Despite targeted expansion, operational improvements and increased market awareness, three years later (six years total under the brand), the Chicago market has struggled to gain sustainable traction, raising significant concerns about its long-term viability,” Eric Cole, managing member of M&M Custard, said in a court filing. 

Freddy’s, which finished 2024 with 550 locations, has been one of the more-consistent burger chains in the industry in recent years. The chain earlier this year was sold to the private-equity firm Rhone Group for $700 million. 

According to court documents, M&M Custard opened its first location of the brand in Jefferson City, Missouri, in 2012. The company said that it was consistently ranked among the brand’s five largest franchisees in “performance, size and AUVs” and has earned multiple awards, including operator of the year, developer of the year and highest year-over-year growth.

Freddy’s in 2021 apparently decided to stop developing corporate locations outside of the Wichita and Kansas City, Kansas, and Kansas City and St. Louis, Missouri, markets, and approached M&M about taking over the Chicago area. M&M bought seven stores from the franchisor in 2021 and 2022. The franchisee spent $1 million to acquire the stores and exclusive rights to develop restaurants in the market, according to court filings.

It then built four high-visibility “billboard locations” in the market to build brand awareness. 

Cole in court documents divided M&M’s holdings into two businesses: Its 31-unit legacy business, which generates $48.4 million in annual store revenue, and the Chicago business, “a toxic asset generating negative EBITDA and creating a financial drag on the overall business.” 

Based on the court filing, a typical M&M location outside Illinois generates more than $1.5 million in revenue per year. In Illinois, an average store generates less than $900,000.

M&M has been steadily shutting down locations in the Chicago area all year, starting with a location in March, another in May, another eight between August and October of this year, and then the 11th and final location more recently after the lease was canceled. 

The franchisee filed for bankruptcy to reject the leases for the locations, and believes that “without the drag from the Chicago stores, the business can be successfully reorganized.” 

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Restaurant Business Editor-in-Chief Jonathan Maze is a longtime industry journalist who writes about restaurant finance, mergers and acquisitions and the economy, with a particular focus on quick-service restaurants.

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