Part One Prosecuted Ohio, This One Does Not
The first letter argued one facet: what a franchisor owes an operator it recruited, and what Wendy’s delivered against that. Everything in it stands. This is the other facet, and it is the operator’s. The brand’s conduct is not re-argued here. It is treated the way the operator should have treated it on the day he signed — as a disclosed condition he was choosing to build on top of.
The Verdict
The operator chose the structure, and the structure is the outcome.
Not over-levered. Not a victim of beef inflation, a value war, or a brand’s six-quarter demand problem. Meritage Hospitality Group sold the only asset in its operation that held value without the franchisor’s permission, spent the proceeds retiring debt rather than changing what a building produces, and did it for five consecutive years while the coverage ratio that decides whether a company lives was collapsing in plain view on its own audited statements.
The demand decline arrived last. The architecture was finished before it got there.
The Five-Year Column Nobody Assembled
Every number below is from Meritage’s own annual reports, in thousands, fiscal years ending the last Sunday in December.
Fiscal 2021: revenue $577,127. Income from operations $18,073. Interest $6,709. What operations left after interest: $11,364.
Fiscal 2022: revenue $626,043. Income from operations $13,973. Interest $8,156. Left after interest: $5,817.
Fiscal 2023: revenue $672,494. Income from operations $17,798. Interest $11,939. Left after interest: $5,859.
Fiscal 2024: revenue $668,803. Income from operations $13,345. Interest $13,012. Left after interest: $333.
Fiscal 2025: revenue $617,667. Loss from operations $28,521. Interest $11,444. Left after interest: negative $39,965.
Read the first four years alone, before the brand’s demand problem shows up anywhere in the numbers. Revenue rose $95.4 million. Income from operations ended $275,000 lower than it started. Interest nearly doubled. The cushion between what the restaurants produced and what the debt cost went from $11.4 million to $333,000 on $668.8 million of sales.
Operating margin across those years: 3.1 percent, 2.2 percent, 2.6 percent, 2.0 percent. Then negative.
A restaurant company at two points of operating margin has no tolerance for anything. Not a cold February. Not beef. Not a promotional calendar it does not control. By the end of fiscal 2024 this operation required everything to go right in an industry where everything rarely does, and it required it while carrying $168.1 million of notes payable and $394.8 million of lease obligations.
The comps decline that the entire trade press is writing about arrived a full year after the cushion was already gone.
Eighty-Four Buildings
The funding is in Note 6 and it is not ambiguous.
Fiscal 2021: 25 sale and leaseback transactions. Net proceeds $59,163. Debt paid down $43,580. Net gains recorded $12,338.
Fiscal 2022: 16 transactions. Proceeds $41,943. Debt paid down $31,589. Net gains $4,178.
Fiscal 2023: 16 transactions. Proceeds $38,198. Debt paid down $30,884. Net loss $88.
Fiscal 2024: nine transactions. Proceeds $20,592. Debt paid down $16,134. Net gain $1,572.
Fiscal 2025: 18 transactions. Proceeds $41,122. Debt paid down $33,684. Net loss $775.
February and March 2026, disclosed as subsequent events: three more. Proceeds $6,907. Debt paid down $4,059. Net gain $2,021.
Eighty-four buildings in five fiscal years, 87 counting the ones sold while the default was running. Total proceeds across the five fiscal years: $201,018. Total income from operations across those same five years: $34,668.
Six dollars of real estate monetized for every dollar the restaurants produced from operating.
The balance sheet records the conversion in a single year. Property and equipment net fell from $156,534 to $110,145. Operating lease right-of-use assets rose to $395,271. Recognized operating lease liability: $401,494, against total undiscounted future lease payments of $560,569 and a weighted average remaining term of 13 years. Notes payable: $158,611.
The lease obligation is two and a half times the bank debt, and not one line of the coverage of this bankruptcy mentions it.
The Landlord Took More Than The Brand Did
Fiscal 2025 rent expense: $46,121 of fixed base real estate, $2,202 of equipment, $1,786 variable. Total $50,109.
Franchise fees the same year: $23,970. Advertising: $25,433. Combined: $49,403.
The landlord took more out of the operation than Wendy’s did.
Every dollar of the royalty and advertising load was imposed by an agreement the operator signed with a counterparty that held the menu, the price, the daypart and the calendar. Every dollar of the rent was created by the operator himself, one building at a time, in transactions he initiated, at a price he negotiated, with proceeds he directed.
My published standard on this has been in print for years. Total occupancy costs belong at 6 to 8 percent of gross sales, and above 8 percent the operator is working for the landlord. Meritage’s total rent expense on $617,667 of revenue is 8.1 percent. The full occupancy line on the statement of operations is $89,357, which is 14.5 percent of revenue.
Across 364 restaurants at fiscal year end, that is roughly $127,000 of fixed real estate rent per building per year, against roughly $1,697,000 of revenue per building, in a quick-service operation. And every one of those buildings used to be an asset the operation owned.
The Profitable Year Was Not Profitable
Fiscal 2024 was the last year Meritage reported net income: $8,019.
Income from operations that year was $13,345 and interest was $13,012. Other income, net, was $8,803 — the line where sale and leaseback gains are recorded.
The restaurants cleared their own interest by $333,000. The reported profit came from somewhere other than operating restaurants.
That is the mechanism paying its own bill. The transaction that permanently raised the operation’s fixed cost is the transaction that made the year look successful. Nobody at that table had to lie, mislead anyone, or breach a duty. The accounting worked exactly as designed, and it rewarded the move that was killing the business.
Two Hundred Million Of Goodwill Against Ninety-Eight Million Of Equity
Goodwill on the fiscal 2025 balance sheet: $201,019. Total equity: $98,457.
Strip the goodwill and equity is negative $102,562. That goodwill is the accumulated premium paid to acquire restaurants operating a brand the company does not own, in a system where it controls two of the five fundamentals that decide whether a restaurant lives.
In fiscal 2025 the company engaged an independent third-party valuation specialist for its annual goodwill assessment. The result was a $4,220 impairment — about 2 percent — recognized in a year carrying a $31,517 net loss, a covenant default, every dollar of term debt reclassified from long-term to current, $16,542 of accrued restructure costs, $7,706 of restaurant closure settlements, and $2,348 of rent payments deferred to manage short-term liquidity.
An operation that is deferring rent is not managing an execution problem.
By February 2026 the lender had a Deposit Account Control Agreement in place giving it a perfected first-priority interest in the operating accounts, so on notice of default the bank directs the cash. That is the end state of the architecture, entered voluntarily, seven months before the filing.
What The Proceeds Did Not Buy
Trace the money. Of $201,018 in proceeds across five years, $155,871 went to paying down debt. The rest went into the operation as working capital.
None of it went into anything that changes what a building produces. It could not have. The menu was not his. The price was not his. The daypart was not his. The promotional calendar was not his. The supply commitments were not his. The identity of the Guests eating in his buildings was not his. The brand’s position in the Customer’s head was not his.
Two of the five fundamentals were in Michigan: the buildings and the cast. The operator spent five years selling one of them to make payments on the other three he did not control.
When the response finally came, it was closures and a catering test. Sixty restaurants closed, $100 million off the top line, and per-restaurant sales came out flat — because what a building produces was never the variable. The catering plan required a volume of $500 orders that no operator writes down as a growth strategy unless every instrument that would actually move the number belongs to somebody else.
Why Every Transaction Looked Survivable And None Of Them Were
Nine buildings this year clears the covenant and funds the quarter. The gain improves the reported result. The bank is satisfied. The dividend continues. Nobody signs a document titled year five of consuming the asset base, because that document does not exist. It only appears when somebody assembles the five-year column, and nobody at that table was required to assemble it.
The vocabulary helps. Unlocking value. Asset-light. Recycling capital into growth. Every one of those phrases is supplied by people paid on the transaction, and every one of them describes the same act: converting a thing you own into a thing you rent, permanently, to get cash today.
But the accounting reward is the excuse, not the reason. Once an operator knows the operating side does not clear its own interest, the transaction is irrational on its face, and the ninth one is irrational in precisely the way the first one was. One asset propped up another that was not producing, with no plan to innovate out of the condition — because there was no innovation available to plan.
That is the actual indictment, and it sits years upstream of the first leaseback. An operator who has scoped himself into a system where the only available responses to underperformance are closing buildings and selling buildings has already made the irrational decision. Both responses shrink the thing producing the money. The transactions are not the failure. They are the evidence of what he had already given up the ability to do.
The Exit Was Owned By The Counterparty
The one move that would have worked was selling the restaurants and doing something else.
That move required the franchisor’s consent. The buyer pool was other operators inside the same system. And the multiple any of them would pay tracked the comps of a brand running negative 7.8 percent in the first quarter of 2026 against positive 3.9 at McDonald’s, positive 5.5 at Burger King and positive 8.0 at Taco Bell.
So the exit had to be approved by the counterparty whose decline created the need for it, and its price fell as the need rose. Which means the exit was only available early — when the buildings were still worth something, the system still looked healthy, and nothing yet appeared wrong enough to justify leaving.
That is the loop, and it is the thing no franchise attorney, no association, and no trade publication will put in front of an operator before he signs. An operator who owns two of five fundamentals does not merely lose the ability to fix the operation. He loses the ability to leave it on his own terms, because the asset he would be selling is a claim on somebody else’s performance.
The Diagnostic Any Operator Can Run This Week
Five reads. None of them require an advisor and all of them use numbers you already have.
Test one, the coverage read. Take income from operations for each of the last five years and subtract interest expense for the same year. Write the five results in a column. If the number is falling while revenue is rising, the operation is being funded by something other than the operation, and you have a capital structure problem that no amount of execution will reach. Meritage’s column reads $11.4 million, $5.8 million, $5.9 million, $333,000, negative.
Test two, the conversion read. For every year, count the buildings you owned at the start and the buildings you owned at the end. If ownership is falling while unit count holds or grows, you are converting assets into fixed obligation. Then divide total proceeds from those conversions by total income from operations over the same span. Meritage’s ratio is about six to one.
Test three, the ownership read. List the five fundamentals. Perspective, Product, People, Performance, Profit. Against each one, write who holds the authority to change it. If three or more belong to a counterparty, every dollar you borrow is levered against somebody else’s decisions, and the correct leverage for that operation is not the leverage an independent can carry. Nobody in franchise finance will tell you this, because the lending model prices real estate and system averages, not authority.
Test four, the occupancy read. Total occupancy over gross sales. Above 8 percent you are working for the landlord. If any part of the number came from selling buildings you used to own, note the year each transaction happened and what you did with the cash. If the cash went to debt rather than to something that changes what a building produces, the transaction bought a period and raised the cost of every period after it.
Test five, the exit read. Price your exit today. Who must approve the transfer, who is realistically in the buyer pool, and what multiple does that pool pay against your system’s current comps. Then ask what that number was three years ago. The difference is what the delay cost, and the direction it is moving tells you what waiting another year will cost.
Any two of these reading positive means the architecture is deciding the outcome and execution is not going to reach it.
What You Do Monday Morning
Assemble the five-year column. Income from operations, interest expense, and the difference, for five consecutive years, on one page. Nobody keeps this. Your accountant does not produce it, your lender does not ask for it, and your monthly package does not contain it, which is exactly why a public company with a board and an audit ran off the end of it in front of everyone.
Then put one more line under it: proceeds from any asset you sold in each of those years, and what the money did.
If the cushion is shrinking while revenue grows, you are not running a restaurant company that needs better execution. You are running a financing structure that happens to contain restaurants, and the only question left is whether you find that out from your own column or from a courtroom in Grand Rapids.
The Closer
Meritage executed. March 2026 beat its own budget. It cut $7.3 million from overhead, exited breakfast where the brand permitted and recovered $92,000 a location, ran the same management team that produced a 21.6 percent restaurant operating income margin at Bojangles in the same month the Wendy’s restaurants produced 8.0 percent.
None of it mattered, because by then the deciding variable was not execution. It was an architecture the operator built himself, one rational-looking transaction at a time, across five years in which he sold the only part of the business that was his to sell.
Restaurants do not fail. Operators do. Part one named what the brand owed him and did not deliver. This one names what he owed himself: the refusal, at the start, to build an operation whose only response to trouble was to consume itself.
He had that decision exactly once. Everything after it was arithmetic.
Digging Deeper
Positions on the record across my areas:
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You Didn’t Buy a Business Partner. You Bought a Dependency. — https://hacksterism.jeffreysummers.com/you-didnt-buy-a-business-partner-you-bought-a-dependency-2/
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The Subway Closure Committee Is A Debt-Service Extraction Mechanism — https://hacksterism.jeffreysummers.com/the-subway-closure-committee-is-a-debt-service-extraction-mechanism/
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No Fat To Trim — https://hacksterism.jeffreysummers.com/no-fat-to-trim/
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1,000 Restaurants Bought The Same Operation Last Month — https://hacksterism.jeffreysummers.com/1000-restaurants-bought-the-same-operation-last-month/
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Demand You Create Is The Only Demand You Own — https://physics.jeffreysummers.com/demand-you-create-is-the-only-demand-you-own/
Terms used in this piece: Million Dollar Mediocrity, Static Decline, Franchisor Arbitrage, Road Metastasis, Two Roads, By Design Or By Default. Definitions in the Knowledge Base, https://kb.jeffreysummers.com/
The condition where rising revenue conceals a softening operation is [Million Dollar Mediocrity] — https://kb.jeffreysummers.com/docs/million-dollar-mediocrity/
The operator’s read that the operation is doing just enough is [Static Decline] — https://kb.jeffreysummers.com/docs/static-decline/
The franchisor-side mechanism prosecuted in part one is [Franchisor Arbitrage] — https://kb.jeffreysummers.com/docs/franchisor-arbitrage/
The way a single recalibration compromises more than one Fundamental at once is [Road Metastasis] — https://kb.jeffreysummers.com/docs/road-metastasis/
Not Part Of The Post
WordPress Metadata
Imprint: hacksterism.jeffreysummers.com, plus LinkedIn newsletter
Title: An Open Letter To Wendy’s Part 2: Dear Meritage
Slug: an-open-letter-to-wendys-part-2-dear-meritage
Excerpt: Part 1 prosecuted the franchisor. This is the operator’s half. Five years of audited statements show 84 buildings converted from owned to rented, $201 million of real estate monetized against $34.7 million of total operating income, and a coverage ratio that collapsed while revenue was still climbing. The decline arrived last. The architecture was finished years before it.
Tags: franchise economics, sale leaseback, operator prosecution, restaurant capital structure, Wendy’s, Meritage, franchisee economics, restaurant architecture, occupancy cost, coverage ratio, operator decision
Category: Hacksterism
Series note: Part 2 of three. Part 1 prosecuted the franchisor side. Part 3 teaches the architecture.
Form Note
Operator-side prosecution. Runs on audited financial statements filed by the operator, not on docket coverage or trade reporting. No balance frame — the franchisor’s conduct from part 1 is treated as a disclosed condition the operator built on top of, and is not re-litigated. Own closer, no deferral to part 3.
Fundamentals Coverage Plan
Core mechanism: an operator converts owned assets into permanent fixed obligation to fund continuity while the condition creating the need for cash goes unaddressed. Mint candidate, unnamed pending the workshop. Supporting locked terms: [Million Dollar Mediocrity], [Static Decline], [Franchisor Arbitrage], [Road Metastasis].
Perspective. The operator’s tripwire was revenue and revenue was rising. Income from operations fell while sales climbed $95.4 million, and the read never moved to the coverage ratio. This is [Million Dollar Mediocrity] at 355 units.
Product. Nothing the proceeds bought changed what a building produces, because the product was never his. Every dollar of the $201 million went to debt, not to the thing generating the need for the dollar.
People. 9,000 cast members executing inside an operation running two points of operating margin, with no tolerance for a bad quarter, in buildings sold out from under the operation to fund the next period.
Performance. March 2026 beat budget. The execution was correct and could not matter, because the deciding variable had been fixed years earlier in the capital structure.
Profit. The only Fundamental where the mechanism was visible before the end. Interest doubled while operating income fell. The coverage cushion went from $11.4 million to $333,000 across four growth years.
Source Documents
Meritage Hospitality Group Inc., fiscal 2025 OTCQX annual report, December 28, 2025 — https://meritagehospitality.com/documents/67/Fiscal_2025_OTCQX_Annual_Report_12.28.2025.pdf
Meritage Hospitality Group Inc., fiscal 2024 OTCQX annual report, December 29, 2024 — https://meritagehospitality.com/documents/51/Fiscal_2024_OTCQX_Annual_Report_12.29.2024.pdf
Meritage Hospitality Group Inc., fiscal 2023 OTCQX annual report, December 31, 2023 — https://meritagehospitality.com/documents/38/Fiscal_2023_OTCQX_Annual_Report_12.31.2023_-_Updated_with_New_Title_Page.pdf
Meritage Hospitality Group Inc., 2022 annual report — https://meritagehospitality.com/documents/26/2022_Annual_Report.pdf
