During the buyout boom, private equity firms flocked to casual dining in droves, paying more than they should have for restaurants. Some picked underperforming chains with household names, hoping to refurbish tired brands. MidOcean Partners LP bought Sbarro Inc., while Sun Capital Partners Inc. took Friendly Ice Cream Corp. Others chose relatively healthy businesses. Real Mex Restaurants Inc. landed in Sun Capital's tray, while Castle Harlan Inc. picked Perkins Restaurant & Bakery, merging it with Marie Callender's Restaurant & Bakery to form Perkins & Marie Callender's Inc.

While many restaurant businesses became casualties of the recession, these four investments -- Sbarro, Friendly's, Real Mex and Perkins & Marie Callender's -- stood out at the time for what many considered rich multiples. These ranged from the 8.7 times Ebitda that Sun Capital paid for Friendly's in 2006 to 9.2 times, MidOcean's price for Sbarro. The average trading multiples for restaurants then was around 8 times Ebitda.

The sponsors made certain investment assumptions, calculations that ultimately crumbled amid the financial crisis and the protracted economic recovery. They were betting that the chains could be improved or continue to grow at a pace at which they could reasonably pay off debt, and eventually turn a big profit for investors.

But when the economy went into a tailspin and consumers increasingly ate meals at home, restaurant operators were left with a plateful of debt that needed to be restructured.

What's notable here, of course, is not the sponsors' resounding success in casual-dining buyouts, but rather the opposite. These four investments stand out for their problems.

While each of these restaurants struggled with distinct difficulties, a common failing emerged: poor stewardship by management and their private equity owners. As the combined effects of weighty debt obligations and soaring food prices began to take their toll, the restaurants began cutting corners, opting to funnel cash into debt payments while neglecting menu upgrades and other store improvements. Businesses that were starved for capital were forced to seek bankruptcy protection.

"With the restaurant industry, you have to reinvest in the store base," says Josh Benn, Duff & Phelps Corp. restaurant group head. "Any casual-dining business that's been around a long time needs to restructure at some point," especially when competition turns fierce.

Perkins, Real Mex, Sbarro and Friendly's all boast well-known brand names, but they allowed themselves to fall behind in keeping menus and store appearances fresh.

"If you're in the space, you have to reinvent yourself and revitalize your menu on a much more accelerated basis," says Paul Hastings LLP partner Jesse Austin, who worked on the Friendly's and Perkins bankruptcies.

Sun Capital, no stranger to retail and restaurants, sought to apply its turnaround expertise to get Real Mex and Friendly's out of the doldrums. Its involvement with Real Mex, whose assets include El Torito, El Torito Grill, Chevys Fresh Mex and Acapulco restaurants, began with a $359 million leveraged buyout in August 2006, in which Sun invested $199 million in equity. Not long after, the company's loss-making operations, facing rising debt levels in the wake of buyout, were hard hit by weak consumer demand. Real Mex posted a significantly larger net loss in 2008.

In November 2008 the Cypress, Calif., restaurant operator restructured nearly $200 million of debt, with Sun ceding control to noteholders. Sun later bought back shares for an undisclosed amount, eventually regaining control. But the business succumbed to depressed retail markets in Florida and California, where the majority of its outlets were located. Real Mex filed for Chapter 11 protection on Oct. 4 in the U.S. Bankruptcy Court for the District of Delaware in Wilmington.

A day later, on Oct. 5, Friendly's followed suit. The Wilbraham, Mass., family-dining chain blamed soaring food prices and declining sales. The business operated 490 restaurants in 16 states.

At the time Sun took Friendly's private for $337 million in 2007, Goldman, Sachs & Co. touted it as a "fantastic" brand, despite its mixed financial performance. Friendly's financial woes only worsened with the downturn. In the two years leading up to its Chapter 11 filing, the price of butter increased by 57.5% and the price of milk by 22.2%. And at the same time that costs were rising, sales dropped 8.2%.

Sun Capital's Marc Leder told The Deal magazine later that his firm had purposely put Friendly's into bankruptcy proceedings to eliminate "bad stores and liabilities." The company would have defaulted on a senior secured revolver had it not filed for bankruptcy protection. Sun Capital got the company back as the sole stalking-horse bidder, providing a $75 million credit bid on Jan. 9, but its prepetition equity was wiped out.

Sun Capital did not respond to requests for comment.

Memphis-based Perkins & Marie Callender's likewise suffered from the housing market collapse in Florida and California, where the chain was heavily concentrated. Castle Harlan had acquired the owner of Perkins, the Restaurant Co., in 2005 for $245 million and Marie Callender's Restaurant & Bakery in 1999 for $152 million. The buyout firm then consolidated Perkins Restaurant & Bakery and Callender's Restaurant & Bakery in 2006. At the time of Perkins & Marie Callender's bankruptcy filing on June 13, it had 160 company-owned Perkins restaurants in 13 states and 314 Perkins franchises in 31 states in North America, plus a total of 122 Marie Callender's outlets.

At least 58 of 65 company-owned restaurants scattered across the country were shuttered a day before the filing, many of them catching diners midmeal. As with most other failures in the sector, the business was loaded with debt, about $441 million worth of liabilities, and revenue had plummeted. According to court papers, many of its outlets had become "facially dated and stale," which made it difficult to maintain traffic.

The company eliminated most of its debt and emerged from Chapter 11 on Nov. 30 under a new owner, Wayzata Investment Partners LLC, while Castle Harlan's equity, which was never disclosed, evaporated.

Sbarro's problem, meanwhile, owed more to its ubiquitous presence in shopping malls, where customer traffic had also slumped. MidOcean acquired Sbarro in November 2006 for $450 million, putting in about $120 million in equity. Sbarro defaulted on a loan in 2010 and had hired Kirkland & Ellis LLP to work on a prearranged reorganization plan through which MidOcean might have regained a toehold on ownership. MidOcean and Ares Corporate Opportunities Fund II LP were second-lien holders. First-lien lenders won out, and the prearranged plan fell through, leaving MidOcean empty-handed.

Sbarro and the others aren't out of the woods just yet, as they maneuver in a weak economy and against harsh competition. Not a few will struggle to regain consumer confidence. "Obviously, it's a very competitive space," says Paul Hastings' Austin.

At least one restaurant head seems to have learned some lessons from last year's pains. Real Mex CEO David Goronkin indicated that upgrades are part of the chain's restructuring plans now that it has emerged from bankruptcy with considerably less debt.

David Pittaway

Castle Harlan Inc. managing director David Pittaway is a veteran of restaurant investing. Out of the more than a dozen restaurant deals he has led during his 25-year tenure at Castle Harlan, only two of them failed. One year ago, portfolio company Bravo Brio Restaurant Group Inc. completed a successful initial public offering. Prior investments include McCormick & Schmick's Seafood Restaurants Inc., which Castle Harlan owned twice, and Morton's Restaurant Group Inc. Puerto Rican Burger King franchisee Caribbean Restaurants LLC is the firm's only active restaurant investment.

Before he joined Castle Harlan in 1987, Pittaway, 61, was a special assistant to the president at the now-defunct Donaldson, Lufkin & Jenrette Inc. and a management consultant at Bain & Co. He is also a former attorney at Morgan, Lewis & Bockius LLP. Pittaway received his B.A. from the University of Kansas and his M.B.A. and J.D. from Harvard University. -- Demitri Diakantonis

Robert Sharp

MidOcean Partners LP managing director Robert Sharp's career has spanned a range of consumer and retail purchases. Besides Sbarro Inc., Sharp also worked on the firm's acquisition of accessories maker Totes Isotoner Corp. in 2007 and weight management company Jenny Craig Inc. in 2002, which was sold to Nestlé SA for $600 million four years later.

Before joining MidOcean, Sharp was a managing director at DB Capital Partners Inc. and served as a principal at Investcorp International. Sharp received his M.B.A. from Columbia Business School and his B.A. from Union College. -- D.D.

Gary Talarico

Gary Talarico led several of Sun Capital Partners Inc.'s retail investments, including Friendly Ice Cream Corp., Boston Market Corp., Marsh Supermarkets Inc., ShopKo Stores Inc. and VPS Convenience Store Group. As a Sun managing director and head of New York operations, he also played a principal role in the 2008 purchase of Mark IV Industries Inc., a $1.2 billion maker of high-performance automotive systems and parts that careened into Chapter 11 in April 2009 holding $1.1 billion in liabilities.

In early 2009 Talarico was laid off as part of a firmwide attrition. He joined Cora Street Partners LLC as a managing partner before being named CEO and president of Boston-based Gordon Brothers Group LLC in July.

A former investment banker, Talarico cut his teeth at Lehman Brothers, then at Deutsche Bank AG's Tokyo office, where he was head of global corporate finance in Japan. He holds an M.A. in international economics and Asian studies from Johns Hopkins University, and an M.S. in political science and a B.A. in sociology, both from Illinois State University. -- D.D.