Riley chief tells advisors he's "not naive" to franchise deal fallout

Riley chief tells advisors he's "not naive" to franchise deal fallout
It's unusual for brokerage chiefs or senior officers to admit any shortcomings in their operations.
AUG 12, 2024

In an unusual mea culpa, Bryant Riley, the founder and co-CEO of the eclectic securities firm B. Riley Financial, addressed the firm's several hundred financial advisors, along with employees, Monday morning regarding the fallout from its investment a year ago in the Franchise Group Inc.

The message? The Franchise Group has been a "hard fought battle" for the firm, and a "weaker consumer spending environment" harmed the business, according to the email from Bryant Riley.

He made the internal statement to reassure workers as his firm was grappling with a slew of bad news.

B. Riley, with the ticker RILY, said in a press release early Monday it expected to report a non-cash markdown of approximately $330 million to $370 million linked to its investment the Franchise Group. B. Riley also announced it was suspending the dividend on its common stock, which saw its share price plummet more than 50% in trading and was trading slightly above $8 after 1:00.

A year ago, B. Riley's share prices was above $58.

Meanwhile, Bloomberg News reported on Monday that the Securities and Exchange Commission is looking into whether the firm provided accurate information to investors about the Franchise Group deal, in which the firm invested $216.5 million as part of the $2.8 billion management-led acquisition of Franchise Group, also known as FRG.

The business controls franchise brands such as Pet Supplies Plus, Wag N’ Wash and The Vitamin Shoppe.

It's highly unusual for brokerage chiefs or senior officers to admit any shortcomings in their operations, strategies or deal-making, but Bryant Riley took that path Monday morning. “I am not naïve to the distractions and reputational challenges this has created for our firm," Riley rote to employees in a company-wide email. "I fully recognize how disappointing the FRG transaction has been for our employees, our investors and our partners."

"Moreover, I regret that at times this noise has overshadowed the fundamental strength of B. Riley and the talent that resides across each of our businesses, all of which have continued to perform for our clients," he wrote, adding: "I want to thank you all for your continued dedication, trust and patience throughout what has created a challenging business dynamic four our firm.”

Bryant Riley did not address or mention the potential SEC investigation in his email to financial advisors and employees. A company spokesperson did not comment about the reported SEC investigation into the Franchise Group investment.

"B. Riley has been built by working with smaller companies, an underserved group of clients," said one senior industry executive, who spoke to InvestmentNews confidentially about the matter. "It's done smaller deals and makes it easier for smaller investors. The questions is, that worked in a bull market with zero interest rates, but what about now?"

In January, Brian Kahn stepped down as chief executive of Franchise Group, just months after a leveraged buyout aided by B. Riley Financial Inc., as regulators looked into his ties to the collapse of a hedge fund.

In April B. Riley said that an independent investigation had concluded that the firm and its executives had no involvement or knowledge of any suspected misconduct linked to the Franchise Group. 

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