Three Dough Boys Chapter 11 Closes Episode in Mr. Gatti’s Saga
Mr. Gatti's Pizza is known for its pizza buffet and family-oriented game room. Three Dough Boys, a franchisee in Austin, Texas, has filed for Chapter 11 bankruptcy protection.
When Three Dough Boys, comprised of former Papa John’s execs Jeff Tisdel and Kenny Starks plus a third partner, bought 13 corporate locations of Mr. Gatti’s Pizza in Austin, Texas, in 2018 for $4 million, the three were hailed as “a powerful addition for our brand.”
Now the investment group has filed for Chapter 11 bankruptcy protection in the Northern District of Texas. It listed assets ranging from $500,000 to $1 million and debts ranging from $1 million to $10 million.
“Too much debt,” is the reason for the filing, said Robert Simon of Whitaker Chalk, who’s the attorney for Three Dough Boys. The stores were operating well enough, but “not adequate to support the debt levels.” Smith said he’s been talking to potential buyers, “and the intention is to sell it to one buyer, another Gattis franchisee.”
In 2018, Mr. Gatti’s was said to be rebooting its brand and had begun franchising again after seven years with no openings. Three Dough Boys signed in September 2018, and a mere four months later, in January 2019, Mr. Gatti’s filed for Chapter 11. By July 2019, the relationship had deteriorated to the point that Three Dough Boys filed suit against the franchisor, claiming executives did not disclose financial problems at the firm that led to the corporate filing.
The Three Dough Boys claim against Mr. Gatti’s was settled during the latter’s bankruptcy reorganization and before Three Dough Boys’ Chapter 11 filing. “The suit was without merit, and was dismissed with prejudice in September 2019…in accord with an agreed settlement,” said Jim Phillips, president and CEO of Mr. Gatti’s, via email.
He confirmed one of Mr. Gatti’s franchisees is “actively conducting due diligence with the hopes of acquiring the TBD stores out of bankruptcy in the coming weeks. If that acquisition occurs, we expect the stores to be operated well with a positive impact on the brand.” Even if the acquisition doesn’t happen, “the brand plans to continue to expand in the market where the Three Dough Boys stores are located.”
Mr. Gatti’s emerged from Chapter 11 proceedings in November 2019, after Mr. Gatti’s existing lender “restructured its debt without write-down, and the company is performing as expected under its loan agreements,” Phillips wrote.
There are 69 units open now. “Domestic growth of 10 to 20 stores per year is a healthy goal,” he wrote, adding eight new franchises were sold during the preceding two months since franchise sales resumed. “Mr. Gatti’s performance is solid, and the brand is doing well.”
At the time of the Three Dough Boys lawsuit, the complaint alleged Mr. Gatti’s “misrepresented the financial performance of 13 restaurants and misrepresented Gatti’s insolvency to induce plaintiffs to pay them several million dollars so that defendants could continue to pay off their creditors.” They are now “paying royalties to the same defendants who swindled them.”
At the time Dawn Ragan, chief restructuring officer for Mr. Gatti’s, dismissed the lawsuit as a nuisance, with the claims “wholly without any merit whatsoever,” she said via email. She expected the litigation “should not hold up the company’s exit from Chapter 11, which is expected to occur in approximately 60 days” as of last July.
Cost of investment for a Mr. Gatti’s Pizza franchise ranges from $1.33 million to $5.61 million. The franchise fee is $45,000 to $60,000; the royalty fee is 5 percent. Operators need minimum cash on hand of $399,825 and net worth of $1 million, according to a 2020 posting.
The brand has two business models: Mr. Gatti’s fast-casual restaurant and the “tried and true Gatti’s Pizza family buffet and Midway arcade,” according to promotional materials.