B. Riley retail brokers exposed to deal that’s under pressure

investmentnews.com:

In August, B. Riley Financial Inc., which provides services ranging from investment banking to wealth management, said it had invested $216.5 million as part of the $2.8 billion management-led acquisition of Franchise Group Inc.

Now the Franchise Group’s CEO, Brian Kahn, is under scrutiny, after a report that Kahn has links to a hedge fund manager who pleaded guilty of fraud.

And some B. Riley brokers and financial advisors are facing uncomfortable conversations with clients. Many of those advisors were acquired as part of B. Riley’s purchase last year of National Securities Corp. and raised money for a portion of the funding of the buyout.

“Around $30 million to $40 million raised for the Franchise Group was from retail brokers,” said one industry source, who asked not to be identified. “The brokers are besides themselves, especially the independent brokers, the National Securities guys.”

Other institutional, financial and strategic investors invested approximately $280 million of additional equity capital in the new Franchise Group alongside significant rollover equity contributions from the company’s management, according to a B. Riley press release from August. The management-led consortium acquired all the outstanding and issued common and preferred stock of Franchise Group, which controls franchise businesses such as Pet Supplies Plus, Wag N’ Wash and The Vitamin Shoppe.

B. Riley said Nov. 8 that it was forced to mark down the value of its equities portfolio, resulting in a net loss of $75.8 million in the third quarter, compared with a profit of $45.8 million a year earlier, according to a Reuters report. The next day, S&P Global Ratings downgraded the credit rating of Franchise Group to “B-” from “B” with a