Here's how a thriving restaurant chain went from boom to busted with the IRS knocking on the door.
THE BUSINESS: Dutch-motif family dining, specializing in Dutch-style pancakes
FOUNDED: 1975 CLOSED: 1996
PRIMARY CAUSE OF DEATH: Neglect of core business amid acquisition plans
SECONDARY CAUSE OF DEATH: State-revenue-department raid for nonpayment of taxes
One thing Sytje's Pannekoeken Huis Family Restaurants never lacked was name recognition. The chain of casual-dining establishments was well-known for its puffy pancakes, windmill-kitsch decor, and waitresses decked out in Dutch-style skirts and bodices. But as financial troubles mounted in the 1990s the 15-restaurant chain's low revenues matched its low-country motif. Starting in 1991, the company lost money every year on flat annual revenues of approximately $10.5 million. Last year, Pannekoeken finally removed its finger from the dike and was washed away by Chapter 7 liquidation.
Company CEO Todd Novaczyk, a former Wendy's franchise owner, had bought the Pannekoeken restaurants, based in Edina, Minn., with the help of a partner in 1983, expanding them from 4 company restaurants to 10. The company also had five franchisees. But while Pannekoeken did a brisk breakfast trade, it faced the challenge, common to many family restaurants, of increasing lackluster dinner sales.
Former Pannekoeken employees describe Novaczyk, who did not return Inc.'s calls, as a likable, caring boss, who prior to the 1990s had paid scrupulous attention to the business. "We had no problem dealing with Todd back then," says Tasos Psomas, who still operates a Pannekoeken restaurant in Rochester, Minn., as an independent business. "The restaurants were busy; advertising was nice; menu changes and development were coming down all the time."
But in the early 1990s, restaurant managers and franchise owners witnessed a drop in corporate quality checks, less attention to detail, and a dearth of effective advertising. That happened about the same time that the corporation was pursuing acquisitions and new dining concepts that it hoped would boost revenues.
In late 1993 Novaczyk announced his intent to purchase a small bar-and-grill chain in Seattle, called Yankee Diner. The deal to convert some Pannekoeken restaurants to Yankee Diners fell through in 1994, but the plan revealed the company president's new attitude.
"Novaczyk was really intent on an acquisition strategy, but he didn't have his base covered," says Dick Lee, a marketing consultant who worked with Pannekoeken in 1993 and 1994. "Pannekoeken was his only base, and it needed a lot of attention."
Another acquisition plan fell through in 1994, the same year that Pannekoeken lost $2 million. Soon franchisees began to mutiny, refusing to pay franchise fees. Then in March 1996, the Minnesota Department of Revenue delivered a deathblow when it raided Pannekoeken's corporate-owned restaurants, seizing money and, in some cases, furniture and equipment to satisfy a $300,000 sales-tax debt.
The company filed for Chapter 11 the day after the highly publicized raid. Business dropped 50% to 60%, and Chapter 7 liquidation followed six months later.
Today four former Pannekoeken franchisees are still doing business independently while corporate assets are in the hands of a bankruptcy trustee, who is sorting through a long list of creditors.
One creditor is waitress Kathleen Contons, who claims she's owed $2,000 in wages. She also never recovered her good winter coat, which was locked inside the restaurant where she had worked for nine years. But, Contons says, "more than anything else I was hurt because I didn't get to say good-bye to my customers."