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NexCen President Calms Franchisees' Fears
NORCROSS, Georgia (Blue MauMau) - In an interview, Michael "Chris" Dull, president of NexCen Franchise Management, Inc., the franchising branch of NexCen Brands, Inc., said they are doing everything they can to keep franchisees abreast of the latest developments regarding the company's financial turmoil. "It's discouraging that our parent company is in the situation it's in, but fortunately for me today that's not the business that I am in." Dull explained that his job was to build and support the franchise system, to run the company that is built around franchising.
NexCen Brands stock plunged 77 percent on Monday after warning that it faced a severe cash “squeeze” and that there was "substantial doubt" that it will remain in business. The firm discovered, during a review of its books, reporting errors and its obligation to pay off $21 million in debt by October. NexCen’s portfolio includes Athlete's Foot (a Bill Blass company), Pretzel Time, Pretzelmaker, Great American Cookies, Shoebox New York, Waverly home furnishings, Marble Slab Creamery and Maggie Moos.
Dull said NexCen out of New York is a multi-divisional company which not only operates Bill Blass clothing and Waverly home furnishings, but also runs its marketing and advertising division and deals with the public markets. But he said he has no visibility to that. "While NexCen is looking at its options in generating capital to cover the balloon payment that is due in October, they are also looking at options on the financing piece to restructure that balloon, so that they will have more time to pay down that note.” He adds, "Our guys in New York are working 21 hours a day to figure out how we get that done." Dull said he is briefed on material changes in the company, but, again states his job is to manage the franchise business.
Because the press has been very harsh and quick to predict the worst, Dull said he immediately started getting phone calls from concerned franchisees. Most questions were from operators wanting to know what NexCen’s financial problems means for them today. He responded saying that it doesn't mean anything, that it is business as usual. "We are still in the business of supporting franchise brands and franchisees, and that's what we are doing. We have our list of initiatives and we are tackling them one-by-one."
But Dull admits the questions about the future are the difficult ones to answer. "We don't have our go-forward strategy in place completely, so its difficult to say to a franchisee what it means. We can't predict the future today."
As to questions about the bankruptcy, he said they answered them as honestly as they could. He told franchisees they don't foresee the company being there, but told them, "If NexCen ends up in bankruptcy, the franchise agreements will still be in place and we'll take it one day at a time."
In response to how the NexCen franchise brands were doing, Dull said, "The cookie guys seem to be very happy. Most are multi-unit operators and being associated with them is a lot of fun." He said they are a very sophisticated, well-organized group of franchisees and do a tremendously good job of operating their units. He said they had made great strides with The Athletes Foot, that they have completely rebranded the company. "We've improved vendor relationships. We work every day to find ways to create better discounts and opportunities with the different manufacturers of shoes we sell. We are growing that brand very quickly in domestic and international markets.
Dull had been with Marble Slab Creamery for 11 years prior to joining NexCen. He feels they have seen tremendous improvements in their marketing campaigns that have resulted in increased sales for many of their franchisees. He said they make sure their franchisees receive the support they need.
"As a whole," he said, "Our franchisees have been very pleased with being a part of NexCen as opposed to where they were previously."
Today Dull sent a letter to all of NexCen's franchisees:
Over the last few days, there have been numerous communications regarding NexCen Brands. In an effort to have clear communication with our franchisees, our legal department has created the attached statement regarding the announcement made by NexCen Brands on Monday. I greatly appreciate the communication that I have had with many of you and I welcome any and all questions that you may have.
I would like to reassure you that although we have had negative headlines, the actual situation should have minimal impact on NexCen Franchise Management. We at NexCen Franchise Management remain focused on the franchise business. Our commitment to grow and support our franchise brands goes unchanged.
We will continue to keep you informed of the developments and we greatly appreciate your commitment and hard work in building our franchise brands.
--
Related reading:
Richard, I hear you
The franchisees you are talking about are just like the people who happily pay for an extravagant wedding but bitch about the divorce attorney's fee! Jenny Buchan, Australia
Value of due diligence?
The NexCen situation underscores the inability of franchisees to look into crystal balls to see the future success or failure of a franchisor. In most cases no amount of due diligence by an intending franchisee can foresee the kind of problems that NexCen is experiencing. Jenny Buchan, Australia
Australia Disclosure Rules
Hello Jenny:
Curiosity question about Australian disclosure rules -
Does your country's TPA require a document similar to the US FDD/UFOC to be filed? If so, does a State or Territory have a similar online research tool to California's CALEASI?
Webster - what about Canada? Anyone know of any other country with a similar online resource?
No filing in Australia - yet
Dan
There is no filing requirement for Disclosure yet, at state level or commonwealth. The recent South Australian review recommended that franchisors be made to file their disclosure documents with the ACCC (your FTC equivalent). No legislative response on that front yet though. Jenny Buchan, Australia
Thanks, Jenny
Is there any informal online library or collection of these documents? How do you get your hands on agreements like Kleins? From franchisees?
Getting your hands on Australian franchise documentation
Dan, there is nothing online as far as I am aware. Getting ones hands on them is almost impossible. Sometimes franchisors are kind enough to supply a copy to researchers. Advisers built up collections. Jenny Buchan, Australia
Jenny, That isn't really so, because...
in real due diligence the survey includes the "who are" questions about the controlling persons. In the instance of NexCen, once a name like Biglari shows up, an experienced DD resource will know immediately that this is probably a hit and run situation.
There are certain types who are simply too opportunistic ever to be credited with any long term positive commitment. Certain types of people tend to have opportunistic exit strategies, and they also tend to impoverish their companies with hiddes fees and "tricks" in syphoning off resources. Not all of them have all the range of negative tendencies. However, as a class, they can be counted on to do whatever they can and devil take the rest.
They will also adopt the most aggressive posture in dealing with any frachisee in a relationship in which agreements tend to be draconian in favor of the franchisor. They only know slash and burn, no matter what the subject may be.
The trouble is that most franchisees won't spend the money for this level of due diligence. They think that up tp $ 5,000(USD) for DD on an investment over $ 500,000 (all contingencies included) is too much money. So be it!--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
That's quite a statement
"As to questions about the bankruptcy, he said they answered them as honestly as they could. He told franchisees they don't foresee the company being there, but told them, "If NexCen ends up in bankruptcy, the franchise agreements will still be in place and we'll take it one day at a time."
Man, that is quite a statement. If I'm a franchisee under one of these brands, I'd be getting together with my attorneys, making damn certain that any special deals or agreements are in writing and incorporated into my franchise agreements. Otherwise, fahgetaboutit.
We've all heard the horror stories of receivership management and debtor in possession when it comes to franchising.
Here's a big 'for instance' - do any of these brands offer gift cards? You just know who will be holding the PR bag on that type of thing when the customers are told they're worthless. Oh, the horror.
Gift Cards
Who markets the card and who is the originator of the NexCen cards?
Oftentimes the "brand" on the card is not who actually got the money for the card. In several of the recent cases involving fees charged on stored-value cards, this is discussed and you should review those cases.
Some franchisors set up a legally separate entity which handles "stored value" cards. As such, the entity would not be affected by the bankruptcy of the franchisor.
BTW: "Stored value" is really a better term in that it encompasses "gift" cards but more accurately reflects the nature of the transaction.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Re: That's quite a statement
Guest writes - "Man, that is quite a statement. If I'm a franchisee under one of these brands, I'd be getting together with my attorneys, making damn certain that any special deals or agreements are in writing and incorporated into my franchise agreements. Otherwise, fahgetaboutit."
TIF Replies - Just what do you think these franchisees are going to talk with their attorneys about...the weather? They have franchise agreements with their respective franchisors who are owned by NexCen, NexCen is not in bankruptcy and if they were what in the heck do you think a franchisee could do then anyway?
The Truth Shall Set You Free!
TIF
Bankruptcy issues
This is beginning to tick me off. Once more, I have to admit that TiF is correct.
Unlike most of the legal issues discussed on this board, this matter falls under exclusively Federal law-- specifically, the Bankruptcy Code (11 USC § 101 et seq.). As such, bloviating is neither necessary nor will it sway a federal judge. (In theory there are state laws which may come into play, but the big enchilada is the USC)
When a person or entity files bankruptcy, their assets (including contractual relationships) become property of the "bankruptcy estate" and the creditors may attend a "341 Meeting" and there will be a committee of creditors set up. A "Trustee" is appointed to manage the affairs
Franchise Agreements are executory contracts which are governed by § 365. They may be assumed or rejected by the Trustee, subject to court approval. They are assumed or rejected in toto: in legal parlance they are assumed "cum onere" (with knowledge of obligations attached).
The important exception in franchise situations is with respect to cross-default clauses and other such mechanisms to intertwine separate but distinct contracts. The majority rule is that where contracts are intertwined such as a Franchise Agreement and contemporaneously-executed real property Lease, the Trustee must accept or reject both together, but where the contracts are only intertwined due to a cross-default clause the court will grant latitude to accept one contract and not the other.
Franchising can be an "us-against-them" game, and it is natural to think that a zor filing will be bad for the zees. But this is not necessarily the case, particularly where the zor works in advance to do a "prepackaged" filing and emerges stronger and more able to grow the system. Many people cite the Southland bankruptcy as an example of this, and for a different perspective on franchisor bankruptcy, a well-respected source is Craig Tractenberg .
Of course, for zees who are in a rocky patch with the zor, the bankruptcy filing can give the zor leverage to present the zee with a choice of settlement on terms advantageous to the zor or the alternative choice of having the Franchise Agreement rejected. (And yes, each Agreement stands alone, so some may be accepted and others rejected).
There is cause for concern by NexCen franchisees, but it is not anything to go running to a lawyer for at the present time. If you do wish to retain counsel, be aware that commercial bankruptcy is an area where you don't want a non-specialist, and there are organizations such as the ABI who can refer you to competent counsel. Also, be advised that significant changes to the Bankruptcy Code went into effect in 2005, so be sure that you are looking at currently-valid research sources.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Nice Analysis
Paul:
Based on your analysis, I am amazed when reading your closing statement of "There is cause for concern by NexCen franchisees, but it is not anything to go running to a lawyer for at the present time."
There is a rare open window here due to the fact that NexCen is a public entity and had to disclose certain material events in order to avoid the SEC hammer. Most franchisees are not given any opportunity to be proactive since private franchisors are notorious for not filing the required material change updates. Especially when they are in financial straights.
That said, NexCen has all but announced the inevitable and there is nothing that says this could not substantially accelerate. Just look at the recent snowballs from Wall St. You've been around for a while and seem smart enough to know that the story/excuses being promoted as the cause of their liquidity woes are likely not the full story.
I certainly did not recommend going to just any lawyer nor did I suggest running around with my head on fire. I suggested that if I was a franchisee in this situation, I would be proactive and seek representation right now. Doing so would make it less likely that I'd avoid being the one left standing without a chair when the music stops.
So, is your advice to a group of multi-unit NexCen brand operators with millions each at stake to just sit and wait it out? To be the only group at the table to be without competent/experienced bankruptcy representation?
Where is the harm of being proactive in this case? Are you offending the franchisor? Please! They all have representation. In the worst case scenario for the franchisees, you invest some money as a group, educate yourself on this complex area of your business, and move on together with the franchisor that never entered bankruptcy. How can anyone promote the risk of doing nothing and waiting things out with this level of information in hand?
Zees rarely want to pay $$
Pls see my post "Tractenberg solution" below as to being proactive.
NexCen and their legal and accounting counsel screwed this one up big-time. There will likely be not only shareholder suits but also suits brought by the corporation against those professionals who advised it and "missed" a little $21 million item.
As to franchisees collaborating, that is rare. If you look at Ground Round, you see the exceptional case of everyone willing to work together and pay for competent counsel.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Re: Bankruptcy issues
You should not be chagrined by your having to agree with me. You will become accustomed to it and even grow to like it over time.
The Truth Shall Set You Free!
TIF
P.S. What I find fascinating are the inexperienced guest posters that opine with such conviction about things they know nothing about.
P-R-O-A-C-T-I-V-E
TIF -
First, do you read AND comprehend?
So, your "advice" would be to consult with experts and properly plan your strategy/options the day AFTER they file for bankruptcy?
How many different ways does someone need to say that your brand (and your future) is going to be controlled by a third party in short order?
You are obviously either clueless about how these matters (bankruptcy and franchising) play out or you are just writing nonsense to get attention.
The "Truth" that you promote Shall Royally Screw You!
R-E-A-C-T-I-V-E
Until they actually file for bankruptcy it is a wait and see situation, but if you think that franchisees should run screaming like "chicken little" to their attorney then so be it. The franchisees have franchise agreements with the franchisor, these agreements are assets of the franchisor (part of the estate) and they are in effect.
If NexCen files bankruptcy these agreements are still in effect so long as NexCen does not reject them under protection of the bankruptcy court. The franchisee still must live up to their end of the contract for as long as the contract is in effect.
The Truth Shall Set You Free!
TIF
If the franchisees get themselves a Real tough litigator
to represent them, the notion that the franchisor holds all the cards in bankruptcy is simply a myth. Just as franchisors use the bankkruptcy laws to hide from thehir obligations while insisting that the franchisees observe all of theirs, that can be turned around rather adroitly.
But it aint cheap. Litigators who know how to do this aint cheap. The reason the franchisors get away with it is that the franchisees never get organized and pool resources to hire the best litigators to represent their interests.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Exactly, Richard
Richard:
Well said and exactly the point trying to be made above. Very coherent! Are you laying off the bottle on Fridays mornings now? ;-)
The suggestion is not to be "chicken little" but to be the bad-ass rebel proactive sheep that gathers a bunch of the other like-minded sheep together and protects themselves while all the others calmly walk off the cliff.
The irony in this case is that I believe Athlete's Foot already went through a similar issue a few years back. Anyone?
Re: Exactly, Richard
Guest your advice was inaccurate and incomplete. It pre-supposes that the franchisees are organized, that there is a bankruptcy, the franchisees know what they want or need and the know what kind of attorney to hire.
So by all means continue to go off half-cocked and recommend others to do the same.
The Truth Shall Set You Free!
TIF
Backtracking = TIF
TIF:
Back track all you want. "Half-cocked" was your poor advice to just sit and be reactionary and you are just making things worse by flailing in the wind with your nonsense.
My comments presuppose:
a) franchisees are generally reactionary sheep.
b) franchisees generally wait too long to proactively organize in order to protect their own interests.
c) those parties who wait for the bankruptcy or sale event will be at a severe disadvantage. Last I looked, the creditors and franchisors both have strong representation.
d) franchisors and creditors count on attitudes like yours to perpetuate the abuse of franchise agreements at times of bankruptcy and sale - as evidenced by Richard.
Why not just admit that you misinterpreted my initial, very sound comments and advice and just move on? You should run for President with all of your flip-flopping and retread/spin attempts to cover for your own poor advice.
I've figured out the real meaning of "TIF" - It is the opposite of FIT, as in FIT TO GIVE HELPFUL ADVICE TO FRANCHISEES.
Tractenberg solution
Rather than bickering, how about discussing Craig Tractenberg and how he worked a novel and mutually-beneficial solution in the Ground Round case?
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Tractenberg Solution
The Tracetenberg/Franchisee Cooperative solution may have been mutually beneficial but the concept was certainly not 'novel.' The Straw Hat Pizza franchisees pre-dated Ground Round by nearly two decades.
http://www.franbest.com/franbestcheckem-out/straw-hat-pizza-2/
The FACTS will set you FREE!
And the guy who masterminded that was
a great guy named John Hatch. I know Hatch and Trachtenberg. Hatch is the guy who did it first.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Straw Hat Franchisees Screwed Up
Wow these franchisees had an opportunity to convert to Pizza Hut 24 years ago and decided to stick with Straw Hat?
Just brilliant since they now have a whopping 50 units and what could they have made of their businesses had the converted, who knows?
The Truth Shall Set You Free!
TIF
Ground Round of Rebound
I -think- we are all saying the same thing...TIF...stop gloating on your little Steinberg support sound-byte and delve a little deeper into Paul's legal analysis. Man, you really are a Presidential candidate.
Paul, can you deflate his expanded head a little? You've created a monster. Is your advice for Nexgen zees to not seek experienced counsel?
In the Ground round case, two germane statements stand out to me:
1. "Benepal's enthusiasm evaporated when he received an alarming phone call from a franchisee on the East Coast: The parent company of Ground Round had run out of money, and it was ceasing operations immediately."
and;
2. "While the bankruptcy meant that the 59 company-owned restaurants would close, 72 franchise stores—owned by local proprietors under license from the chain—stayed open in 19 states. Many customers however, who had read or heard news of the bankruptcy, did not distinguish between a company-owned or franchise-owned store. (After all, by design they are supposed to look the same.) Within a few weeks, Mike Metz, who at the time owned three stores in Pennsylvania, saw sales fall almost 20%. Several franchise restaurants that had been struggling were forced to shut down, says attorney Craig Tractenberg, a partner at Nixon Peabody in Philadelphia who was hired to represent the Ground Round franchisees."
In this case, even though the result of the experience was a 'positive' wouldn't there have been a lot less stress and hand-wringing in those first months if the franchisees got wind of the impending bankruptcy and were able to be proactive? If they had not been blind-sided and had Tractenberg earlier...could those struggling franchisees have made it? Could those long-term employees jobs be saved?
This is what the NexGen franchisees have in their favor - forewarning and important info. but some of you suggest just waiting for "the alarming phone call" - I just don't get your logic and 'object lessons' like this seem to support proactivity!
Collective action
The key is franchisee action which is:
That is virtually unheard of in franchising, which is why Ground Round was so unusual and got so much attention.
More likely is the nonsense of the comment about "getting together with my attorneys, making damn certain that any special deals or agreements are in writing and incorporated into my franchise agreements. Otherwise, fahgetaboutit."
As a starting point, it might be helpful to gain a rudimentary knowledge of the Bankruptcy Code, deal with your franchisee association, and not spring into that adversarial stance which seems to pervade franchising.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
I disagree with Paul somewhat
What these franchisees need to do now is to retain the services of a good franchise analyst/litigator, together with the services of a good bankruptcy lawyer who isn't just a pencil pusher - one with a dorsal fin and a few rows of teeth.
The game plan has to be very adversary if they are to have any wampum for the bankruptcy event or approaching the bankruptcy event. Not having you guns loaded and at the ready at the nstant when they are needed is not a formula for success. Lose your lead time and you will suffer for it.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Maggie Moos - Any of you attroneys wnat some billbale hours?
Hello,
Seems like there are few attorneys on this blog, might want to speak to one of you if you want the “billable hours”.
I signed a franchise agreement for Maggie Moos November of 07, I did my DD, actually went a second time to check out Nexcen after the acquisition. UFOC financials were clean, now….?
Was going to sign a lease next week, obviously not going to happen now.
Not really interested in a class action deal. I’ll settle for my $33K franchise fee and whatever you can get from Nexcen to make to happen. Interested?
delam@heritagepalms.org
FYI, Nexcen failed in performance on at least one franchise agreement doc, support has been attentive yet unproductive as far as negotiating a business deal, might be understandable, now that I know what is going on, but not acceptable and probably out of compliance on their end.
Email me if any of you attorneys want to talk. I am on the west coast.
NexGen Franchise Association Links
Could someone post links to these franchisee associations that Paul suggest these franchisees contact and work with?
Re: Collective action
Paul please stop emphasizing my point, before the Guest has a conniption.
The Truth Shall Set You Free!
TIF
TIF's 15 Seconds
TIF is peeing his pants because finally someone said something about him.....except the truth, which is that he is the supreme troll. I'll handle that. This proves that he's only here for much longed-for recognition. TIF, I hope I don't have to slap you down again and make you go away. Take a deep breath and relax. You're trying to extend your little 15 seconds into something which it is not. Can you legally drive yet?
Re: TIF's 15 Seconds
You are not man enough to slap me down boy! Once you grow a pair we'll see who slaps who down.
You don't even have the courage to register anonymously on BMM so who are you trying to kid?
The Truth Shall Set You Free!
TIF
NexCen illiteracy
Let's face it, though: these people in January '08 signed documents agreeing to come up with $30 million by October 17 '08-- and now they tell us in May '08 that they just found this out.
And when the Legal Department says the company may be soon kaput, and that the "going concern" issue was present when the banks let it borrow an additional $70 million in January '08..
So for those who think that only franchisees can be lazy illiterate idiots, take heart...
NexCen lawyers and bankers have you beat by a mile.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
There neverr was any intent to repay.
No one misread anything. All they wanted was to get the loan funded, scram with the money and collapse the company.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Richard, please stop
Richard, please stop destroying my faith in humanity or I won't be able to buy that franchise Jim Amos is pitching me.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Here Paul!
You can joing good ole Amos:
http://www.tastidlite.com/index.php/own-a-center/own-a-center.html
Fecal matter is not
compresible--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
Re: Tractenberg solution
I like to bicker!
Besides I am resplendent in the glory of Paul's reluctant admission of me being right. I am finally getting credit from the BMM intelligentsia and not a moment too soon.
The Truth Shall Set You Free!
TIF
Nothing could be further from the truth
You LOVE to bicker. Finally truth from Truth In Franchising.
Yeah
I'm finally old enough that I have to elect sex or booze. The fun parties that you may remember are no more.--
Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
TIF
The zees are the zors assets, right? So if a zor goes out of business the zees have to pay their creditors from the royalties. Correct me if I am wrong.
OK
You are wrong.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Not OK...
I beg to differ and will settle with you that I am still right and Generalissimo Franco is still dead.
If you restore me to being right I will cease gloating.
The Truth Shall Set You Free!
TIF
That is good to know
Thanks Paul.
Paying bankrupt party
I'm surprised at the number of people who believe that if you owe someone money and they file bankruptcy you don't have to pay them back. You do have to pay, it is just that your payment becomes part of the bankruptcy estate.
And sometimes the Bankrupt will come to you and offer to settle for cash right now. Don't do it--the debt that you are to repay is part of the bankruptcy estate, and any such settlement must have court approval. If you get that kind of feeler, contact the Trustee.
Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400
Liar
Cover your &*(^!
MaggieMoo's
So everyone else is fine. Your stocks are fine.