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Chapter 11 reorganization on the horizon for Quiznos

Competition among U.S. restaurants has been recently increasing as newer chains expand quickly in Ohio and across the country. In today's highly competitive restaurant industry, it takes very little for a business to face diminished cash flow, causing it to reconsider its operating strategy.

Just four days after Sbarro LLC filed for Chapter 11 bankruptcy for the second time in three years, Quiznos sought bankruptcy protection from its creditors. Quiznos underwent an out-of-court financial restructuring that eliminated about $300 million in debt in 2012.

According to a company statement, Quiznos now seeks to implement a reorganization that would cut debt by $400 million. The plan is supported by many of the company’s senior lenders. The restaurants will remain in operation while the plan is ongoing.

Under Chapter 11 bankruptcy, a debtor usually proposes a plan of reorganization to keep its business alive and to pay creditors over time. This gives businesses that are facing serious financial troubles the opportunity to remain open while working toward maximized profits. The proposed plan was unanimously accepted by the first-lien lenders who cast a vote at the time of the filing.

Business reorganization can be crucial to businesses struggling to keep their doors open. Like Sbarro, Quiznos is facing its second restructuring within a short period. With the backing of the majority of its lenders, however, the second time may be a charm. Quiznos may learn from the circumstances, which included unemployment, store closures and franchisee complaints, that made business reorganization necessary in the first place. With this knowledge they could implement a new strategy that works.

Source: Bloomberg, "Quiznos follows Sbarro into Bankruptcy Court," Dawn McCarty and Leslie Patton, March 15, 2014

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