(Bloomberg) -- Bryant Riley, the co-founder of investment firm B. Riley Financial Inc., told employees he feels “personally sick” after the collapse of Franchise Group Inc., which came a little more than a year after he helped to arrange a $2.8 billion buyout that became one of his firm’s key holdings.

The August 2023 deal for Franchise Group, or FRG, saw B. Riley take a stake of about 31%, with much of it pledged to B. Riley’s lenders. The Chapter 11 bankruptcy that FRG declared Sunday erased FRG’s equity, leading to another impairment of $120 million for Riley’s Los Angeles-based company, on top of previous writedowns of up to $370 million, according to a statement. 

“This is not the outcome we ever envisioned,” said Riley, the firm’s chairman, in an email to employees that was included in a regulatory filing. “I feel personally sick about this result.” B. Riley’s shares tumbled as much as 20% in New York trading.

FRG, which houses brands including Buddy’s Home Furnishings and the Vitamin Shoppe, will be taken over by its lenders under a plan that will see some of the business continue operations, according to a Nov. 3 statement. Still, the implosion and wipeout of the FRG stake marks a stunning reversal for Riley and the company he founded along with his onetime close friend and business partner: ex-FRG chief executive Brian Kahn. 

Kahn was another key figure who helped push through last year’s deal to take FRG private. The investment was tipped into turmoil just months later, when Kahn was forced to step down amid a US criminal investigation into his role in the collapse of hedge fund Prophecy Asset Management. Kahn has categorically denied wrongdoing or any knowledge of misdeeds by the managers of Prophecy, and said he was among those who were defrauded as a result of Prophecy’s demise. 

FRG’s businesses failed to perform as expected since the deal. This created what Riley described as a “confluence of events” that “derailed our original investment thesis.”

“The investment was devastated by the precipitous decline in consumer spending in the markets served by the FRG brands, and the fallout and uncertainty from the Prophecy scandal and the related federal investigation into Brian Kahn,” Riley said. 

B. Riley shares have plunged 86% over the past 12 months while investors betting against the stock have assailed Riley over the FRG deal. The firm suspended its dividend and is selling off assets to concentrate on cutting debt. 

Riley apologized to B. Riley workers for the “pain” they have had to endure. He cited “internet short sellers,” “one-sided journalists” and “competitors aggressively targeting your livelihood by trying to poach customers and colleagues.” 

“You’ve faced enormous pressure,” Riley wrote. “For that, I am deeply sorry.”

FRG filed for Chapter 11 in Delaware, listing almost $2 billion of debt, according to court documents. The company said Sunday that lenders agreed to supply the company with $250 million in Chapter 11 financing. This, along with cash it already has on hand, will provide the business “with ample liquidity to maintain operations across its businesses and fulfill go-forward commitments to employees, customers, vendors, franchise partners, and other stakeholders,” according to the statement.

Nomura Holdings Inc. arranged a $500 million term loan for B. Riley to help finance the FRG takeover, with FRG equity pledged as collateral. The firm remains current on this debt after terms were renegotiated, and Riley said he expects it to be paid down to $125 million by the end of this month, leaving enough capital available for B. Riley to return to growth.

“OUR FIRM WILL MOVE PAST THIS AND THRIVE,” Riley wrote. “Despite the negative headlines, we are in far better shape than folks give us credit for.”

--With assistance from Eliza Ronalds-Hannon, Reshmi Basu, Jill R. Shah and Jenny Surane.

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