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Brokers are the Primary Way to Make Illicit Earnings Claims

Franchisor salespeople are incredibly foolish when it comes to brokers.

The franchisor has the franchise broker make the illicit earnings claim to the prospect thinking that they are absolved from the act of making an unfounded and unsubstantiated claim on the potential revenues and profits of the franchise being sold.

The franchisor is responsible for everything the franchise broker says to a prospective franchisee.

So if you've been given a false earnings claim by a broker and can prove it call your franchisee attorney and sue both the franchisor, the franchise broker and the franchise salesperson from the franchisor (personally).

They will settle.

On these franchise broker cases of fraud in the inducement they always do.

No comparison to Realtors

RE brokers are licensed and regulated. If they say something impermissable they can be sanctioned up to losing their license.

Try asking your real estate broker if it is a "safe" neighborhood or what the racial composition of the high school is.

To compare franchise brokers to real estate brokers is not realistic.

Not all Brokers are sleazy, Franchise Brokers Ass.

Brokers don't get paid unless the buyer buys. Same is true for real estate agents. And in most cases buyers are spending more $. Do more research you will see. Go look at FBA.

Franchisees: Just move to Denver

Bugsy: You forgot to mention that Dick Schaden and the Missus gave all that money to feed homeless people in Denver.

Schaden cares!

Bugsy Denaro's picture

Still bread on the table for Q

Q franchisees are not toasted enough. Dere's still money on the table, bread to be had. Q needs to more aggressive-like pursue terminated zees' homes, cars and all personal assets. If 'dem broken zees are not begging someone for shelter and food, then someting is wrong with Q and its outside counsel.

Eye of the tiger, Q.

Don Sniegowski's picture

Whew, that reward from China for Yum was short

Whew, that reward from China was short lived. The analyst for Janneys Market Capital wrote to investors, "Risks include Chinese media attention surrounding bird flu and the corresponding effect that can have on the same-store sales trends of KFC China." Today's news brings real world risk for Yum that Kalinowski broadly was talking about. Here:

Dragon TV said Sunday that Husi, owned by OSI Group of Aurora, Illinois, repackaged old beef and chicken and put new expiration dates on them. It said they were sold to McDonald's, KFC and Pizza Hut restaurants. - Associated Press

As a result, Yum Brands stock price that dropped after its quarterly announcement has been dropping today. See here:

Yum Brands stock price; Google Finance

Reuters reports that Yum, McDonald's apologize as new China food scandal brews

Why Not Partner?

Why not combine Quiznos and Crumbs Bakery Shops much like DD and Baskin Robbins have been partnered. The public would get new offerings at their favorite sandwich shop, both systems would benefit from additional revenue, and when Quiznos makes that inevitable Chapter 7 filing and closes down franchisees would get the Crumbs.

Q Franchisees Already Toasted

I don't think you need to worry about Quiznos terminating franchise agreements. I know they're trying to force franchisees to sign extensions using termination and store forfeiture as a threat but what will Q do when franchisees walk away? Churn them? You can't give these dogs with fleas away. Run them as corporate restaurants? Rick Schaden had a plan to reopen 600 restaurants as corporate Q's. None survived to tell the tale. The only way these smart investors have to salvage any part of their investment is to keep franchisees afloat until they've taken every last dollar and then file a Chapter 7 and let the remaining creditors fight over an empty shell.

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MCD and Subway vs Crumbs

More difficult to make a cupcake than to make a sandwich or a hamburger.

FuwaFuwaUsagi's picture

the definition

re·tard·ed  [ri-tahr-did]  adjective

  1. characterized by a slowness or limitation in intellectual understanding and awareness, emotional development, academic progress, etc
  2. Anyone  s t u p i d enough to buy into a feakin’ cupcake concpet as a franchisee.

=============================================================
A cupcake franchise - really.  You are going to pay 35K or whatever to learn how to make cupcakes?  And then pay a 6% or so royalty on every dollar that goes through your register and 2% or so advertising?    Really???  Hey why not buy a popcorn franchise too or heated nuts concept.  Sheesh...

"Never underestimate the power of s t u p i d people in large numbers"

We have a plan

"Say: 'Unfortunately, the market moved, but we have a plan...The future is nanoburgers!'" - Bugsy

If you say, "The future is organic 3D fries," then that will also pacify investors.

Bugsy Denaro's picture

Private equity formula for crummy franchising

Right now d'ese small cupcake chains do not have 'da proper economies-of-scale. See? Variable costs can be more than the price that consumers will accept for a cupcake. And fixed costs are too damn high. Da solution for investors, say a Mr. Lemonhead or a Ditsy Spotz Corporation, is to establish a count of 2,000 franchises. Dat's only 40 franchises per state.

Here's my private equity solution for crummy franchising:

1. Sell, sell, sell. Hire guys and firms 'dat know how to polish dis turd. Take it from a seasoned franchisor, once 'da Crummy system is big and crummy enough, variable costs will come down and 'da brand will be ingrained enough with consumers to attract good store traffic. Hey, ya gotta break a lotta eggs to sometimes make a good omelet.

2. Churn, baby, churn. Most likely 'da new private investors will need to sell and churn 8,000 franchises to hit a stable 2,000 bakery shops. But hey. Being able to make 'dose hard decisions to leverage udder people's mullah is why 'dey pay private equity firms 'da big bucks.

3. Remember your timing in the equity investment cycle. It may take eight years to build to 'da critical mess in store units but 'da good news for 'da private equity firm is when franchise chains like 'dis burst, the initial equity firm will have profitably exited as the private equity turnaround cycle matures in six. 'Da key is not to be 'da last dummy investor before 'da franchise system goes under. Look, if y'a don't have enough guts to see harm come to your fellow equity firms, you wimp, 'den take Crummy public again. Dump it on the stockmarket and let those masses of crummy dummies take a bath, while trying to figure out what happened. Here's how you calm stockholders, noteholders and analysts when 'da poop hits da fan. Say, "Unfortunately, the market moved, but we have a plan...The future is nanoburgers!"

4. Go after easy money. Let 'da utter equity guys spend money in order to financially survive when 'da franchise system implodes to go after 'da now hard to get personal savings and assets from the failed or exiting franchisees. Dis is risky so make sure to hire good attorneys at 'da outset to make sure youse liability is nuttin' from equity investors and franchise owners.

Ya gotta luv' 'dis franchising industry 'dat gives enterprising folks like me so much opportunity.

Fixing Crumbs cupcake shops to be profitable can be simple

The solution to Crumbs, or even Gigi's gourmet cupcake shops, is obvious. If you want a franchise to break even, just up the price to $30 per cupcake. If that's not doable, then limit the average cupcake price to $25; however, the brand managers will need to figure out how to increase average store traffic by 30 percent. That should be simple play for Gigi's in Tupelo, where Mississippians love their sweets.

I would expect that Crumbs and Gigi's are in a mad dash to sell more stores (franchises) than the other to have first mover advantage and become a national name. I'd suggest focusing like a laser beam first on West Virginia, the diabetes capital of America.

See? Fixing the shops to be profitable can be a simple thing. ;-)

These Cupcake Shops

Hard to make money with these cupcake shops. Add in bankruptcy and an ownership group looking to recoup losses and potential franchisees are set up to fail. Now figure no strong franchisee association and no franchisee co-ops and this has Quiznos (loser) written all over it.

Hard to make money with cupcake shops?

"The fundamental problem was that its shops could not make money. The market was also shifting away from cupcakes."

What about Gigi's Cupcakes? Are their hundred or so franchises spread throughout the U.S. profitable? Are their gourmet cupcake stores also seeing a dwindling trend that is pulled away by cupcake substitutes?

Value In The Brand

Crumbs had 65 stores. People know about it and talk about it. However, their turnover was not enough to support the fixed cost rents in the high traffic markets they were in. Nearly all of the locations were losers.

Marcus Lemonis is smart enough to see that a quick turnaround strategy through a chapter 11 reorganization can salvage the remaining brand value. After Crumbs got delisted from the NASDAQ, and forced to shut down all of its locations overnight, it became an attractive play for pennies on the dollar. I do not think an immediate franchising strategy is appropriate. A new business model needs to be created, tested, and proven in different markets.

The end result will be that the new owners will definitely make money on Crumbs' next wave up.

Crumbs - All Investors Have Left

Actually, Crumbs is the Quiznos of the Bizarro World. They bent over investors with the idea that a system of company owned stores would be successful long-term. Now that's been proven wrong and investors for this money making scheme have dried up they're looking to bring in more potential marks to buy the failed stores and turn Crumbs into a franchise system.

In Quiznos case after the supply of franchisee marks dried up and Q's couldn't be given away Rick Schaden unveiled a plan to open 600 corporate owned restaurants using former franchisee locations. He raised millions from investors looking to cash in on a low cost investment with high upside. The plan failed. The few corporate Q's closed, the investors were out millions, and the remaining money disappeared down a rat's hole. True, Quiznos is in Chapter 11 but isn't it easy to see Q declare Chapter 7 sometime real soon?

To sum up, Crumbs bent over investors and now wants to bend over franchisees. Quiznos bent over franchisees and then bent over investors. Bizarre, no?

A Big Red Flag

Crumbs has already proven that its business model doesn't work . That's why it filed for Chapter 7. The idea that this group of charlatans believes, after ripping off investors, it can revive itself by becoming a franchise system and rip-off those wanting to buy into the American Dream is just another example of why the system is broken and why there needs to be more regulation on prospective and current franchisors and franchise systems.

john a. gordon's picture

A more realistic view of Crumbs

Don...its not that demand for cupcakes vanished. It was never there except in a handful of neighborhoods in the US , in the first place. The business model caused the implosion.

Because bakery and high calorie items are difficult, this concept may never be properly franchisable. Paul's note as to Grand Central Station is telling. Only one of those. Someone may try to franchise it, of course. This is really a case of buyer beware.

Paul Steinberg's picture

The IFA could perform a true public service here

Crumbs cupcakes were large and tasty; a full days worth of calories in one frosting-topped sitting.

Recognizing the magnitude of this crisis, I will offer advice pro bono to anyone willing to reopen the store at Grand Central Station. Said advice shall consist of urging the expeditious restoration of baking activities on the premises.

BTW: the photo was not staged. At the Manhattan locations, former patrons are gathering and peering thru the windows in disbelieving anguish.

If franchising can come to the rescue, it is incumbent on Steve Caldeira to call an emergency meeting of the IFA executive board.

Re: Failures

Quiznos sold 6,000 individual restaurant franchises. They then churned a few thousand of those and a small percentage were sold by one owner to another. Today there are right around one thousand still open. 30-50 are closing every month. The actual percentage of failed Quiznos franchisees is at 90% and rising. There is no turnaround story here for the remaining franchisees and any of those seeking a low cost way of buying a business and getting in on the American Dream. Sign the contracts and you've signed up for a visit to bankruptcy court and chapter 7. Reject Quiznos. Say no to any franchising "opportunity" offered by former Q CEO Rick Schaden. You deserve better.

Failures

Very surprised to see Quiznos wasn't much higher.
Still, a 39% failure rate is AWFUL.

Don't have to be a stock owner for it to matter

"the stock price only matters to the company..."

Ah yes, grasshopper, but what matters to the franchisor can be a leveraging opportunity for franchisees. See?

Unless Papa Murphy's franchisees own stock...

Unless Papa franchisees own stock, the stock price only matters to the company, the PE firms and the investment banking firms involved.

Papa continues to lag its pre-IPO expectations and will continue to do so with a Animal House CEO team, $8000/week stores, and costly remodels. Don't at think stock analysts are neutral, they are paid to have an positive opinion. Finally, Carol Tice's silly pro-company banter in the last FORBES article is nothing more than sweet nothings.