Veteran Franchisee MM Custard Seeks Chapter 11 Protection After Chicago Market Collapse
The fast-casual restaurant industry faces another significant setback as MM Custard, a prominent multi-unit franchisee operating Freddy's Frozen Custard & Steakburgers locations, filed for Chapter 11 bankruptcy protection in mid-November. The Kansas-based operator, which manages 31 locations across six states, reported liabilities totaling $27.7 million against just $5.2 million in assets, revealing a financial crisis that has been brewing for years. With more than 100 creditors now waiting in line, this bankruptcy filing highlights the mounting pressures facing restaurant operators nationwide.
Founded in 2010 by entrepreneur Eric Cole, MM Custard grew into one of Freddy's most active development partners over the past decade. The company operated locations throughout Missouri, Kansas, Illinois, Indiana, Kentucky, and Tennessee, becoming a cornerstone franchisee within the Freddy's system. At its peak, MM Custard commanded 42 Freddy's locations, representing a significant portion of the brand's footprint in the Midwest and contributing to the chain's ambitious expansion strategy that helped Freddy's generate nearly $990 million in systemwide sales by the end of 2024.
Despite the bankruptcy filing, MM Custard has indicated its intention to maintain day-to-day operations across all remaining 31 locations during the restructuring process. Company leadership emphasized that the filing represents a strategic reorganization rather than a liquidation, with management working to ensure minimal disruption to customers and employees. The bankruptcy court filing confirms that funds will be available to pay unsecured creditors as the company works through its financial restructuring, offering some reassurance to vendors and suppliers caught in the company's financial web.
Chicago Market Woes: How Six "Toxic Asset" Locations Brought Down a Thriving Franchise Empire
The root cause of MM Custard's financial collapse traces directly to its ill-fated Chicago market investment, which court documents explicitly labeled as a "toxic asset" that generated consistently negative earnings. In 2021, Freddy's corporate headquarters approached MM Custard with an opportunity to acquire six underperforming company-owned stores in the Chicago area, offering exclusive development rights for the market. MM Custard invested $1 million to purchase these struggling locations, betting that operational improvements and increased market penetration could turn the Chicago stores into profitable ventures.
The gamble failed spectacularly. Beginning in March 2024, MM Custard started systematically closing its Chicago locations as losses mounted and market conditions deteriorated. Court filings cite a combination of sustained negative EBITDA (earnings before interest, taxes, depreciation, and amortization), minimal buyer interest in the underperforming assets, and an increasingly burdensome regulatory and tax environment in Illinois as key factors eroding the market's viability. The 11 Chicago-area stores that MM Custard ultimately operated—including both the acquired locations and newly developed units—became a financial anchor dragging down the entire portfolio's performance.
Despite implementing targeted expansion strategies, operational improvements, and marketing initiatives to boost brand awareness, the Chicago market never achieved the traction MM Custard anticipated. After six years under the Freddy's banner in the region, company leadership acknowledged that the market raised "significant concerns about its long-term viability." This Chicago experience underscores a critical challenge facing franchise operators today: the difficulty of accurately assessing market potential and the devastating financial consequences when expansion bets go wrong. The remaining 31 MM Custard restaurants outside the Chicago market generate $48.4 million in annual store revenue, demonstrating that the company's core operations remain viable when separated from the Chicago losses.
Freddy's Frozen Custard Responds: Corporate Stability Versus Franchisee Financial Distress
Freddy's corporate leadership moved quickly to distance the brand from MM Custard's bankruptcy filing, issuing statements emphasizing that the situation represents an "unfortunate and isolated" incident that doesn't reflect the overall health of the franchise system. The company characterized the bankruptcy as a franchisee-specific issue unrelated to Freddy's corporate stability or the performance of other franchise operators across the national network. This messaging aims to protect the brand's reputation and reassure other franchisees, potential investors, and customers that Freddy's remains on solid financial footing despite this high-profile franchisee failure.
The distinction between franchisee performance and corporate health carries significant weight in the franchise industry. Freddy's ended 2024 with approximately 560 locations nationwide, up from 550 units earlier in the year, demonstrating continued expansion momentum. The brand's systemwide sales reached $987.6 million in 2024, representing a 6.8 percent increase over the previous year—figures that suggest strong overall brand performance despite individual franchisee struggles. Franchise restaurants averaged $1.86 million in sales last year, a slight decrease from $1.87 million in 2023 but still indicating relatively healthy unit-level economics for most operators.
Freddy's corporate commitment to supporting MM Custard through the restructuring process reveals the delicate balance franchise brands must maintain when dealing with troubled operators. The company pledged to "do all it can to ensure the restaurants see little to no interruption" while MM Custard completes its financial reorganization. This support strategy protects customer experience, maintains brand consistency, and preserves the value of locations that could potentially transfer to new operators if MM Custard ultimately exits some markets. The brand's confidence in a "positive outcome" suggests potential solutions ranging from debt restructuring to possible sale of locations to better-capitalized franchisees, though specific details remain undisclosed as the bankruptcy proceedings continue.
Restaurant Industry Crisis: Why Multiple Franchisees Are Seeking Bankruptcy Protection in 2024
MM Custard's bankruptcy filing isn't an isolated incident but rather part of a disturbing trend affecting quick-service and fast-casual restaurant operators throughout 2024. The year has witnessed multiple franchise groups seeking bankruptcy protection, including a large Burger King operator, a multi-unit Tropical Smoothie Café owner, and the sprawling EYM Group, which held franchises for Pizza Hut, Denny's, Panera Bread, KFC, and Burger King locations. These bankruptcies reveal systemic challenges facing multi-unit operators who are caught between rising operational costs and increasingly budget-conscious consumers pulling back on discretionary spending.
The economic pressure on restaurant franchisees stems from a perfect storm of escalating expenses across every operational category. Labor costs continue climbing as minimum wage increases sweep across states and municipalities, while workers demand higher compensation to keep pace with inflation. Food costs remain elevated due to supply chain disruptions and agricultural commodity price increases that show little sign of abating. Rent and utility expenses compound the problem, particularly for operators locked into long-term leases signed before recent commercial real estate price surges. These margin-crushing cost increases arrive precisely when consumer spending patterns shift dramatically, with lower- and middle-income diners—the core customer base for many fast-casual concepts—reducing restaurant visits and trading down to value options.
The franchisee bankruptcy wave exposes a fundamental vulnerability in the multi-unit operator business model. Franchisees who aggressively expanded during favorable economic conditions now find themselves overleveraged and unable to absorb losses when several locations underperform simultaneously. Unlike single-unit operators who can pivot quickly, multi-unit franchisees face complex organizational structures, higher overhead costs, and obligations to multiple stakeholders that limit flexibility. The Chicago regulatory environment that MM Custard cited as particularly burdensome exemplifies how regional variations in labor laws, taxation, and compliance requirements can make identical restaurant concepts profitable in one market but financially unviable just states away. This geographic risk represents an underappreciated challenge for franchisees pursuing rapid expansion across diverse markets.
What's Next: Implications for Freddy's Growth Strategy and the Franchise Industry Future
The MM Custard bankruptcy raises critical questions about Freddy's expansion strategy and franchise development practices moving forward. The brand's aggressive growth trajectory—more than doubling unit count from 236 locations in 2016 to 560 today while nearly tripling sales—relied heavily on partnerships with multi-unit developers like MM Custard. The failure of such a significant "veteran franchise group" that Freddy's corporate once praised for "consistently fueling franchise development" may prompt the brand to reevaluate how it selects franchise partners, structures development agreements, and provides support for operators entering challenging markets.
The practice of selling underperforming corporate stores to franchisees—the strategy that contributed to MM Custard's Chicago troubles—deserves particular scrutiny as the bankruptcy plays out. When corporate headquarters offloads struggling locations to franchise operators, it transfers risk while maintaining franchise fee and royalty income regardless of unit-level profitability. This creates potential misalignment of incentives where corporate benefits from expansion even when individual locations struggle to achieve sustainable economics. The MM Custard case may influence how franchisors approach market exits and whether they provide more robust financial modeling and support when convincing franchisees to enter markets where corporate-owned locations have already failed.
Looking ahead, the franchise industry faces a reckoning about sustainable growth models in an era of economic uncertainty and changing consumer behavior. Brands may need to prioritize franchisee profitability over raw unit count expansion, implement more stringent financial qualification requirements for multi-unit developers, and provide enhanced operational support for locations in challenging markets. For existing franchisees like those operating under MM Custard's remaining 31 locations, the outcome of this bankruptcy will establish important precedents about debt restructuring, creditor treatment, and the viability of continued operations under financial stress. The story's resolution—whether MM Custard successfully reorganizes, sells locations to new operators, or ultimately liquidates—will offer valuable lessons for the hundreds of franchise operators navigating similar economic headwinds across the restaurant industry.