Smashburger’s former CEO sues over shares’ value
Smashburger’s better burgers sell units.
A second chain owned by Rick Schaden is in a dispute over valuation, following two hedge funds’ suits against Quiznos. This time, Smashburger’s former CEO is suing over the worth of his shares.
Another restaurant chain owned by Quiznos’ founder Rick Schaden is facing allegations it understated its own valuation during an ownership transfer.
The latest dispute involves Smashburger. And the allegations come from its former CEO, Dave Prokupek, the man who helped turn the concept into one of the fastest-growing franchises in the country. Prokpupek argues in a lawsuit filed in Delaware that the fast-casual burger chain manipulated its own valuation to avoid paying him the full value of his ownership in the concept after his firing late last year.
Smashburger has filed a legal action, too, against Prokupek. Attorneys for both sides did not comment for this story.
The dispute traces back to last year, when Smashburger was up for sale. Sources have indicated to our sister publication, the Restaurant Finance Monitor, that the company sought a high valuation. Prospects backed off, the sale collapsed, and in November Smashburger fired Prokupek with little explanation.
Prokupek had worked with Schaden for years, as the managing director of Consumer Capital Partners, the investment firm Schaden created from funds earned through his ownership in the Denver-based sub chain, Quiznos. Prokupek was named chairman and CEO of Smashburger in 2008. At the time, the chain had just two locations.
But Smashburger quickly became one of the few chains to grow rapidly during the recession, and also emerged as a leader of the burgeoning “better burger” restaurant sub-segment. The chain’s system sales were $228 million last year, and it had 248 locations.
By the time of his termination, according to legal filings, Prokupek had built up significant equity in the business. How much is uncertain, because the portions of the filings that deal with the amount have been redacted.
Early this year, Smashburger exercised its right to buy back Prokupek’s shares of the company, or “units,” as they’re described in filings. The two sides differed over the value of those units, and then they couldn’t agree on an independent valuation expert to determine the number. Prokupek suggested investment banks. Smashburger suggested accounting firms.
Eventually, in July, Smashburger took Prokupek to court and asked a judge to appoint a valuation firm. In its lawsuit, Smashburger said Prokupek’s valuation expert called the value of his shares “substantially higher” than the company’s valuation of those shares.
In a countersuit, Prokupek said he was terminated “without cause,” and he charged Smashburger of engaging in “improper tactics” so the chain could “avoid paying Mr. Prokupek fair market value for his units.”
According to the countersuit, Prokupek agreed to a new deal with the company in June 2013. That deal converted equity he had in the company to restricted units and options, so Smashburger had to meet certain performance metrics for the units and the options to vest. The deal was done before the auction, to encourage a sale, but in the lawsuit Prokupek claims he was “asked to re-earn equity that he had already earned.”
The former CEO says in his countersuit that Smashburger “improperly calculated EBITDA” or gross earnings to make it appear the company missed those performance metrics.
Prokupek, now the CEO of the tax franchise Jackson Hewitt, claims in his lawsuit Smashburger also changed its internal valuation methodology and ignored market data from the auction, which “compounded the undervaluation of the company.”
Prokupek calls Smashburger’s actions “significant manipulations … of its financial performance and valuation.” He asked the court to oversee the valuation process, in addition to hiring an independent firm.
Schaden-owned companies have been accused of manipulating valuations in the past. In 2001, for instance, Schaden and his family took Quiznos private. Investors later sued the company, and a court found the Schadens undervalued the investors’ shares by undercounting the number of planned store openings.
In August of this year, Schaden and former owners and managers of Quiznos were accused of hiding negative information, and of raising prices for struggling franchisees, so the company could meet financial projections ahead of a debt-for-equity swap. That swap in 2011 transferred ownership of the company to lenders Avenue Capital and Fortress Holdings.
Quiznos struggled in the two years after that and filed for bankruptcy last year. Those two hedge funds then sued Schaden and the chain’s former managers.