Investment case, as joint asset deal and E-commerce play; strategic turn-around plan, whereas franchisers ultimately became beneficiary owners.

A landmark turnaround in the retail toy sector through a joint asset deal, in which franchisees emerged as the ultimate beneficiary owners. This strategic initiative arose after a well-known toy retailer failed to meet its obligations, hindered by the burdens of its traditional brick-and-mortar business and an overleveraged financial structure.

As the retailer neared bankruptcy, an investment team (sponsor) – backed by Encina Oak – reached out to the network of franchisees, convinced of the untapped potential within the business. Working together, the sponsor and approximately 120 franchisees developed a comprehensive turnaround plan with the following key elements:

– Store Transfer: Franchisees agreed to take over roughly 100 previously company-owned stores that had demonstrated profitability.

– Control Retention: The franchise network retained full control over the franchise organization, while the investment partner continued to operate the E-commerce business.

– Asset Acquisition: Franchisees were given the opportunity to purchase the stores—including inventory and associated goodwill—at a discount. The acquisition was 100% financed by Encina Oak.

– Controlled Wind-Down: For the approximately 100 stores not included in the restart, a managed wind-down process was organized to minimize value loss for all stakeholders.

– Minimized Capital Outlay: The overall capital requirement for the acquisition was limited, as all parties accepted a modest loss in value and risk, with the process secured by the inventory assets.

Although the investment partner – backed by Encina Oak – was not the primary bidder in the initial process, the team is proud of this investment case, describing it as a textbook example of a sustainable restart. The outcome represents an optimal scenario for the business: over 220 stores continuing operations, maximized employment, a soft-landing for wind-down stores, and limited value loss for stakeholders and the industry at large. By assisting individual franchisees in financing their newly acquired stores, the investment team extended its involvement across the capital structure.