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The Sad Fall of Geeks On Call, A Franchising Story

A notice of default & foreclosure has been filed to the SEC by Geeks On Call and 1-800-905-GEEK. In the SEC 8-K mandatory filing, the franchisor says:

Geeks On Call Holdings, Inc. has been served notice of default and foreclosure from a senior creditor on a note secured by  substantially all the assets of the corporation.  The Geeks On Call Holdings, Inc. Board of Directors, acting with regard to their obligation under the security agreement of the promissory note in default, passed a resolution to surrender the assets upon the request of the secured creditor. As a result of the foreclosure and surrendering of substantially all of the assets of the corporation the Board of Directors has determined that the Company can no longer continue operations. [SEC filing as reposted on UnhappyFranchisee.com]

The computer repair service franchise was founded in 1999. It rose to 140 franchised locations in 11 states. The trade journals loved this concept, despite the franchisor being unable to run at a profit. It was named among Franchise Times’ 55 fastest-growing companies and named best new franchise concept in the nation by Entrepreneur Magazine in 2006.

Riding a tide of accolades and publicity, CEO Richard Cole then came up with a brainstorm of an idea that he ramrodded down his executive team and board's throat. The company could pick up the volume of orders by rebranding its name from the more memorable “Geeks on Call” to “1-800-905-GEEK.”

Sales slumped.

By 2008 the company realized it needed serious cash to keep going and decided on an initial public offering. That’s when it had to disclose its financial earnings to meet SEC rules, rather than the loose franchise disclosure document regulation, where it could post just about whatever it thought appropriate as a financial statement. Unlike the previous franchise buyers and trade journals, savvy market analysts now had the necessary information to realize that the franchisor was flat broke and had been since the beginning.

The company really started to crash, according to today’s The Virginian-Pilot, and as that happened its officers and board felt the pressure for a short-term lift from franchise fees gained by selling franchises at a one-time $25,000 fee that its new franchisees pay for the honor of running a Geeks On Call. The franchisor wanted to sell franchises to dig itself out of its hole of debt and to make its virtual business one day become profitably real. The CEO publicly rationalized that the franchisor would continue to sell franchises and gallantly incur losses in order to benefit its franchisees.

The SEC financial filings revealed, despite the popularity of its original brand and the growth of its franchise footprint, the company had never turned a profit. Cole [former CEO of Geeks On Call, Richard Cole] said in an interview in January that profitability was attainable, but was not the focus of the company up to that point.  “At any point I stopped expanding, the company would have been in the black,” Cole said. “But that’s not valuable to franchisees.”  Vanderslice [VP of operations who helped start the chain] agreed. “During my time there we were plowing every cent we had back into making our franchisees and our brand more successful, sacrificing immediate profits for the long term,” he said. - The Virginian-Pilot

Its franchisees disagreed.

Revealing its failure to earn a profit chipped away at the confidence of its franchisees in corporate’s ability to sustain itself. And later that year, the company said in a filing that its accountants “expressed doubt in our ability to continue as a going concern.” - The Virginian-Pilot

Ten lawsuits were initiated by Geeks franchisees alleging fraud and breach of contract by their franchisor. All suits were dismissed by the courts.

Despite being unable to pay creditors, Vanderbilt thinks that the company can be saved if a brilliant CEO and team of virtuous executives were now to step in. "If [new CEO Davis] can replace the current leadership with qualified individuals who know how to build a business and do so using ethical means, there is hope that the company and brand can be meaningful and successful again,” he told the Virginian-Pilot.

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Don Sniegowski is editor of Blue MauMau, the daily news journal for franchise & small business owners. Call him at +1 (270) 321-1268, tweet @bluemaumau or email don@bluemaumau.org.