by You might recall that 15 months ago, we used this space to erect a metaphorical pinboard or “murderwall” like those found in procedural crime dramas. Our quest was to find out why Franchise Group would dump Badcock Home Furnishings for nothing more than about $3 million in stock (estimated) just two years after acquiring it for $580 million. How did a once-great, family-owned chain turn into curb fruit?
Since that time, a lot of questions have been answered, but a lot of new ones have taken their place. Also since that January 2024 column, we’ve learned a great deal more about B. Riley Financial, the boutique bank that helped FRG go private and that brokered the Badcock sale, and about former FRG CEO Brian Kahn, whose trail of tears stretches back to Aaron’s and continues through the hotly contested bankruptcies of Buddy’s Home Furnishings and American Freight on the FRG side and Badcock and Conn’s subsequent to selling off Badcock.
To place the pushpins and string them together back in early 2024, I used the forensic tools of news and business databases, archival research and a careful reading of financial statements. Since then, I’ve added several hundred pages of court documents. My goals included identifying motive, means and opportunity, and I reminded myself that guessing is how reason proceeds in the absence of facts.
Follow the money
At the center of most of this isn’t furniture, but rather receivables — paper. Financing. More on that in just a sec.
First, the tectonic event that continues to ripple through these many bankruptcies: the $294 million in missing money at Prophecy Asset Management, a firm with close ties to Kahn at the time.
Bloomberg had just reported that John Hughes, co-founder of Prophecy, admitted to defrauding clients of that nearly $300 million, using a “sophisticated” investment scheme to do it. In pleading guilty to commit securities fraud, Hughes named two co-conspirators. Several news outlets and lawsuits since have named Kahn as one of those other two co-conspirators, and according to Bloomberg’s reporting, Kahn was a money manager for Prophecy with control of 86% of Prophecy’s funds at the time the money went missing. Kahn has denied knowledge of or involvement in the fraud.
So, back to the pinboard: Where is (or was) the $300 million? This is still not clear, at least not clear enough to put on record here, but it’s likely gone for good. What can be stated as fact is that FRG principals, both past and present, face a number of lawsuits by investors claiming to have been misled and that criminal investigations by the SEC and DOJ are underway. These are agencies presumably staring at this same pinboard to find that $300 million.
Why the delay in issuing indictments is anyone’s guess, but it’s possible these agencies are waiting for the bankruptcies to clear. It’s also possible that the change to the new administration from that of Biden has caused delays. I know at least one top SEC investigator stepped down.
To answer the January 2024 mystery, why FRG dumped Badcock, we might re-think who actually acquired Badcock? The financials could be read to interpret B. Riley as the true owner of Badcock, because to make that $580 million acquisition happen, B. Riley agreed to acquire $400 million of Badcock’s receivables with an assurance of taking on more over time, according to Mergers & Acquisitions Online. Not only this, but in mid-2024, B. Riley helped Kahn buy out FRG in a deal worth $2.6 billion, a transaction that saw B. Riley invest another $280 million into FRG, an investment now all but vaporized.
Badcock got dumped at exactly the same time that B. Riley said it wouldn’t take on any more Badcock receivables, a business complicated when Badcock’s in-house financing was shut down. This left only American First Finance, a company Kahn had used for years, to handle all of the paper.
Slicing up the pie
Lost in the shuffle is the fact that upon acquiring American Freight in February 2020, FRG/Kahn pledged $12 million in stock, or more than a half-million shares, to American First Finance for a “referral program,” according to an FRG filing with the SEC in September 2020. The company said that in March of that year, “we entered into a Referral Agreement with American First Finance Inc. pursuant to which AFF agreed to pay us certain compensation in exchange for allowing AFF to establish and provide the AFF Program.” This referral agreement came as quite a shock to Badcock owner-operators.
You can push the timeline back to June 2019, which is when B. Riley brokered the formation of FRG, a $138 million deal that combined Liberty Tax and Buddy’s Home Furnishings. (Kahn was a director of Buddy’s at the time.) B. Riley co-CEO Bryant Riley served on Franchise Group’s board from its inception to March 2020, the same month that Prophecy closed up shop and the fallout began for both B. Riley Financial and FRG.
But let’s push the timeline back even further, to 2018, when B. Riley and Kahn teamed up to attempt to acquire RTO powerhouse Rent-a-Center in a $1.4 billion deal. Kahn was then heading up Vintage Capital Management, the firm tied to Prophecy Asset. Because BRF and Vintage failed to meet a deadline merely to submit a letter of extension, Vintage ended up on the hook for a $92.5 million deal break fee.
Kahn took the stand in court in, ironically for FRG, Delaware, to call Rent-a-Center’s directors and management “a bunch of crooks,” according to a report in the Dallas Morning News. “They absolutely used this process, used this merger agreement, to come in and get everything we did that made Buddy’s grow over the last six or seven years.”
Rent-a-Center was at the time the second-largest RTO after Aaron’s. Buddy’s was third.
Kahn’s claim, that the merger negotiations were used to gain valuable business intelligence from a competitor, is really, really interesting and a bit ironic, because lately it’s been six separate groups of Buddy’s Home Furnishings owner-operators claiming a version of the same to contest the way the FRG bankruptcy is proceeding.
‘Can’t we just get along?’
After a re-set with a change in attorneys for FRG, there was at least hope that lenders could agree on a path forward. That hope proved naïve, and this month first lien lenders that are owed about $1 billion sued second lien, or “junior” lenders, who have filed a complaint against the DIP for failing to disclose or otherwise provide information and documentation.
Also ongoing as part of this albatross of a Chapter 11 are no fewer than six claims of “incurable” defaults of the franchise agreements governing Buddy’s Home Furnishings. These five groups of Buddy’s owner-operators are claiming that FRG ownership of American Freight and Badcock violate the non-compete aspects of the franchise agreements in effect for Buddy’s, and each cite the markets in which Buddy’s and American Freight and/or Badcock locations existed within miles of each other. Each franchise agreement is meant in part to delineate the exclusive territory for any one franchisee’s operations, which typically is a radius of 3 miles.
The roster of groups, too, is really interesting. They are led by Buddy Mac Holdings (82 franchises) and include Greene and Greene (78 franchises, Pentex RTO (73 franchises), BB BHF (62 franchises), A-Team (10 franchises) and Reddi Rents Iowa (five franchises).
All five are following the basic blueprint established by a lawsuit brought by another group of Buddy’s owner-operators, MMS Group (five franchises), in November 2022, a group led by Joe Gazzo, the president of Buddy’s Home Furnishings from 2003 to 2015. That suit was settled in arbitration in May last year, or six months before FRG went bankrupt. Terms of the settlement are not public.
From the Buddy Mac filing (docket 644), the groups are claiming that the breaches of the franchise agreement caused them “severe damage, are historical in nature, and either cannot be cured or will shortly be incapable of cure.” Specifically, Buddy Mac Holdings objected to the sale of 12 American Freight locations to AFNewco in mid-January, an objection that eventually got overruled.
Behind the scrim
This takes us to one of the more compelling of the new questions, which asks whether Kahn is in any way connected to the group that just acquired 31 choice American Freight stores out of bankruptcy at the bargain-basement price of $1.12 million, a group organized as AFNewco. If I’m doing my math correctly, that’s about $36,000 per store? In a private sale, meaning no auction, no bidding? And these are 31 of that chain’s best remaining locations?
So, who is AFNewco? At the January hearing during which the selloff was approved by the court, testifying on behalf of AFNewco was Michael Piper, the group’s “managing member.” Piper once was CFO at Liberty Tax. Piper reported to Kahn at FRG, whose board was chaired by current FRG CEO Andrew Laurence.
Matthew P. Ward, a lawyer representing Buddy Mac Holdings, cross-examined Piper at the hearing, interested mainly in the Kahn question. Here’s a snippet of that testimony:
Ward: “Is Mr. Kahn presently or anticipated to be an owner or investor in the business?
Piper: “No.”
Ward: “Does AFNewco have any business with Mr. Kahn?”
Piper: “No.”
Ward: “Any agreements with Mr. Kahn? Any investors in any way related to Kahn?”
Piper: “No.”
Under oath, Piper identified AFNewco’s owners, in addition to himself, as Brent Turner, former CEO at Liberty Tax; Piper’s brother, Scott Piper; Jack Kleinert; and Boston-based Frontier Capital.
In a separate line of questioning, Piper revealed that part of AFNewco’s financial portfolio is $3.5 million received from American First Finance, the company Kahn immediately installed at Badcock after that acquisition, a company with which FRG had “a referral agreement.” Piper said the payment was to secure the exclusive right to finance AFNewco’s customers. American Freight was already AFF’s largest merchant partner, according to one news report.
So, we’re right back to paper: the referral programs, American First Finance and the playbook from FRG.
According to AFF’s filings with the SEC, AFF purchased more than a half-million of FRG stock in March 2020 for $9 million, “in connection with the Referral Agreement, then sold the stock six months later. According to that same filing, these agreements “require the company to pay the dealer a portion of the adjusted net income, as defined by the agreements, on the portfolio acquired by the dealer.”
And yet, according to Piper’s testimony under oath, AFNewco begins with a running start. In addition to the $3.5 million from AFF, Piper says the 31-store group expects to finish 2025 with a free or unencumbered cash flow of $9 million, currently carries zero debt and has access to a $20 million line of credit from Frontier Capital.
If this isn’t enough intrigue and mystery, I’ve got more. Next time, we’ll take a crack at just who owns BB BHF, owners of 62 Buddy’s locations and one of the groups claiming violations of its franchise agreements, and why this group is claiming a violation of its franchise agreement.
