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Quiznos Tells Franchisees How to Close Shop

A Quiznos store shuts down

DENVER – Quiznos released a memo to franchisees this week, leaving franchise owners scratching their heads as to what it means.

Basically, the notice sent by Jim Lyons, chief operating officer, states that some store owners are leaving the system, closing down shop without giving notice to Denver headquarters. He explains, “. . . some may desire to seek other career paths before the end of their franchise agreement, or may become subject to financial constraints.”

Those statements are seldom used by franchisors in addressing franchisees who breach their contracts.

Mr. Lyons reminds franchise owners that when they enter into a franchise agreement they have a commitment to operate their restaurant through the life of their contract. He warns, “Failure to give notice of a closure can be detrimental to the closing franchisee, other franchisees and the Quiznos brand.”

The COO further explains that when no notice is given, it is nearly impossible to transfer the restaurant to another franchise owner or redirect loyal customers to another nearby location and preserve the integrity and goodwill of the Quiznos brand. In some cases where the franchisee closed without notice, he or she may have taken a financial loss that could have been mitigated by selling to an interest buyer.

The memo states that Quiznos will now require “at least 90 days” notice prior to closure. What it doesn’t explain is how giving that notice will protect the them from their obligations. One current Quiznos store owner, who did not want to be identified, said, “The memo is strange to say the least. It says if you close without giving the 90 days notice, it won't be tolerated. It also states that if you give the 90 days notice, you will still be liable under the terms of your franchise agreement. That would mean that you are still liable for future royalties after you close.” He said either way they go franchisees face the same dilemma. “What other company would ever send out a memo like this?” the franchise owner asked.

The most puzzling thing about the memo is that Quiznos is sending it out to franchisees to instruct them how to properly close their stores. One seasoned franchisee said, “It’s like waving the white flag and giving the go ahead for owners to realize they are in a mess that they can’t get out of.”

So what is prompting this kind of memo from a franchisor who is struggling to keep the company afloat? The answer may be in the company’s 500-page franchise disclosure document, that is, if you can understand the numbers.

Quiznos’ Convoluted Franchise Disclosure Document

The March 2013 franchise disclosure document (FDD) shows there are 608 missing franchisees who have either closed down their shop or did not even communicate to corporate headquarters that they had left during 2012. Most would assume that there would be massive litigation filed by a franchisor against absent owners who have breached their contracts.

As of its FDD ending December 31, 2012, Quiznos states it had 1,930 franchised restaurants open, compared to 2,772 at the end of 2010. That shows a drop of 842 units in the two-year period. Another 114 closed or did not communicate they were leaving as of January 2013. That brought the total of units dropped to 956 in the two-year period. During 2012, Quiznos terminated 93 franchise agreements because the restaurants had not opened within 12 month after signing the agreement (Quiznos has the right to terminate under the agreement. The initial franchise fee is nonrefundable.) The FDD states approximately 5% of franchises operating as of December 31, 2012 transferred their franchises.

From January 1, 2012 to December 31, 2012, 124 franchisees had not opened their restaurant within 12 months of signing the agreement. At the end of 2012, Quiznos had five company-owned restaurants. It did not project any more in the next fiscal year. Quiznos projected 26 new franchised units for 2013.

For the same period, “Franchisees Who Have Left the System or Not Communicated,” shows 608. Franchisees Who Have Left the System or Not Communicated without Opening Restaurants is 134.

What do these figures along with Lyons' memo tell us? It may be that franchisees are leaving at an alarming rate, closing or converting their restaurants to competitors. With this latest memo from Lyons, the company looks to be trying to stop the bleeding and save the system.

Another disturbing notice to franchisees

Stuart Mathis, CEO of Quiznos since July 2012, sent out another unexpected notice to franchisees on Wednesday. He stated that John Coletta, chief operating officer also hired in September 2012, is leaving the company to become CFO of Einstein Noah. Mathis said Quiznos will start searching for a replacement as soon as possible.

The chief executive assured franchisees of the company’s vision, saying, “The Quiznos executive team remains focused on implementing positive changes for the brand. We’re continuing to look for ways to return profitability to the franchise system and work toward a positive future—one that we all can be excited about.”

One seasoned franchisee said he and others think they are witnessing the implosion of Quiznos. He doesn’t know how many stores are closing but he thinks it’s probably the highest percentage rate on record. After a long history with Quiznos, he too is considering closing down. “Quiznos franchisees are simply irrelevant in the sandwich market today. It’s a sad experience to go through.”

Another store owner estimates the system is now around 1400 units, or less. He wonders if Coletta left because he doesn’t want to be part of a sinking ship.

Recently, Blue MauMau learned from a reliable source that Terence Kim of Oaktree Capital Management, LP was interviewing franchisees to gather information about the company. The firm was paying store owners $250 an hour to share their knowledge and experience about Quiznos. They were required to sign confidentiality agreements prior to speaking candidly about the Quiznos system.


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