Judge Hoffman’s Ruling Against Quiznos Franchising II LLC (PDF)

Franchise Owner Claims It’s “Impossible to Make Money” With Quiznos

Apparently, in the ten years in which they were looking at the FTC Rule, the FTC/Congress never felt secure enough to do the right thing and mandate the disclosure BY THE FRANCHISOR of unit performance statistics of the system.

Franchisors can use the FTC Rule and the state of the law surrounding franchising to lie, cheat, and steal as they are so inclined with apparent immunity under the law —as long as they have that binding, boilerplate signed contract in hand.

Quiznos couldn’t sell new franchises, in my opinion, if they were required to REVEAL the REAL RISK of an investment in a Quiznos restaurant to new buyers of their franchises, as reflected by the unit performance statistics of their system.

They have case law that protects them in the courts and the courts KNOW that QUIZNOS has millions of dollars of debt under a securitization arrangement that they have used to expand Internationally, etc… Their franchisees are innocents and those investors who are involved in a securitization deal with Quiznos are also innocents.

Now, with a deep recession, even the legalized “churning” and “encroachment” activities of the Quiznos organization may not save them in the long run. Did Mr. B ask –what would Jesus do?

On November 27th, I believe, Bob Baber, who was destroyed by Quiznos, will be dead and gone two years. In his suicide note, available on Google, he indicated that he wanted his sacrifice to mean something and to push the public to an understanding of what is going on.

I have tried to help him by posting what I believe to be the truth on the Internet. I have been banned from two franchise blog sites, Blue Mau Mau and Franchise Pundit, because, apparently, I fault the government for the constructive fraud of the “package” of the misleading and ineffective disclosure document and the unbargained boilerplate franchise agreements. Or, perhaps I was banned because I suggested that the ABA was part of the charade of litigating franchise disputes and the attorneys on these sites didn’t like my comments.

I thank Sean Kelly of Franchise Pick, who is not an attorney, for not banning me from his website.

Our new President has terrible problems to deal with but we will have to try to help him.

Carol

If franchisors like Quiznos can “legally” encroach on their own franchisees to grow the gross sales of the system, franchisees just become resources for the franchisors when the franchisees’ assets continue to serve the franchisor. The SATURATION of markets becomes possible because there is no competition between franchisors of same and similar concepts to CAPTURE the cheap labor and the cheap venture capital of prospective franchisees.

If there was competition among franchisors of same or similar concepts, this would clean up the FRAUD of churning that appears to be so prevalent today in the franchise industry.

Elizabeth tells us the truth about “churning” and ONLY when the FTC decides that it will require franchisors to reveal CHURNING of startup units to new startup franchisees (new buyers) will there be any relief for franchisees. Franchisees are tricked into signing long-term contracts with no disclosure of the material facts concerning the performance of the units within the franchise system, and thus, have no idea of the risk and rewards of the investment.

This subsidy given to the Franchise Industry cannot be justified as free market capitalism and is betrayal of franchisees who are not “protected” by federal regulatory policy from UNKNOWINGLY making very high-risk investments in franchises.

Thank you

Prospective Quiznos buyers please read this carefully. I have always prided myself in that fact that I try to make good decisions. Yet, the decision of my husband and myself to purchase a Quizno’s restaurant is one decision that has been anything but positive. Please take your time reading my story because it may help you to avoid making a terrible mistake. I am hoping that by sharing my experience the information may save your family, finances, sanity and future.

We transfered our Quiznos over 23 months ago. Our weekly labor ranges between 22% to 25% – the goal is 20%. Average food costs range between 30% to 33% the goal is 30%. Not only have we not made money, but we have lost over $45,000 in the last twelve months in addition to $34,000 during the first 11 months. Additionally, another Quiznos near my location is also showing similar dollar losses based upon information that the owner has shared. I realize that there are poor stores in the system. It is unrealistic to assume that every owner runs a great operation. However, our store has one of the highest customer approval ratings in the area. In addition, our location regularly appears on the top half of the weekly blast fax. The blast fax is an intra-company sales reporting tool utilized by owners in order to compare their store statistics to a large grouping within a certain geographic region. It is of great concern that our business is making more than 2/3 of our geographic region and yet we are not even breaking even. One wonders how the stores that are producing less volume than ours manage to survive? The fact is that most do not for long. The owners eventually become disappointed with this company and are either forced to sell or walk away because they can not find a buyer. Despite working as an unpaid “volunteer” at our location for the past 22 months I have never sacrificed quality or service. We have never skimped on labor in order to squeeze more money out of the bottom line. Our store is meticulously clean and the employees are well trained. Yet, despite all of our efforts, we have lost a lot of money. Yes, we conduct local marketing weekly in addition to other strategies that the company suggests to increase revenue – but to no avail. There are a fortunate few that are doing, however, this is a rare exception. I too have a friend that is profitable. Her location is in a busy commercial district with plenty of daytime professional traffic in addition to evening residents as well. She is one of the fortunate stores that appear regularly on the top of the first page of the blast fax. Yet, despite the fact that her store is one of the more frequented locations, she has remarked that because her business is one of the highest grossing stores in the region, she is frankly surprised that she is not making a greater profit. She, like I, works her business diligently both in front and behind the scenes. She is also one of the fortunate few.

In our case, the fact that the company put not one – but three – new Quiznos extremely close to our existing store has been but one of several factors for our lack of profit. Even our customers remark that they are surprised that the company places stores in such close proximity. Our restaurant, once grossed between $9,000 to $11,000 average per week before we bought it. The addition of the other stores dramatically cut into our customer base. Currently, a $9,000 week is the rare exception. After paying over $320,000 for this store, we expected to at least net $70,000 per year. We would settle for breaking even at this point. We still have customers that make the extra trip to patronize our store because we offer the best service and most pleasant environment of the other Quiznos in the immediate vicinity. Yet, that is not enough to help our bottom line.

We realized that we were not going to make money two months into our venture. We put our store on the market right away. Today, almost two years later, we have been forced due to financial constraints to give it away. Another owner has offered us $90,000 and we are finally getting out. He knows that he will make a profit because at $90,000 it is a positive net sum gain for him. A store can not even be constructed for $90,000. He has said that based upon our P&L and the price that he is paying, he will probably make about $30,000 – perhaps $35,000 per year at our location. The key to profitability according to our buyer, is owning several that are purchased for very little and planning to make about $30 – $50K per location based upon the traffic flow of each individual store. The key is to pay as low as possible for a store in order to squeeze out a small profit from each location.

One might ask why do so many franchisees fail to make a profit and so few do?

The answers are:
1) The profitable stores are located in areas with significant traffic flow to offset the high costs associated with operating one of these stores.

2) Non profitable stores (poor operations excluded) have been canabalized by our very own franchisor. It is apparent that none of the company’s decision makers understand the franchisor’s own required reading of “Behind the Golden Arches, The Ray Croc Story”. If they understood the symbiotic relationship that exists between corporate and its franchisees, then they would realize that the franchisee is the life blood of the company and it is not in anyone’s best interest to undermine the very people that make the system operate.

3) A store’s location is not sufficient to produce the high traffic necessary to cover its numerous expenses.

4) In regard to expenses, the franchisor has a monopoly upon most services, food and equipment necessary for us to operate. There are simply too many hands in the till for profit to filter down to the bottom line – the franchisee. There is something very wrong when a person can go to their local Restaurant Depot and find the same exact product made by the same manufacturer, same weight and ingredients but pay half the price of the same item sold by our required distributor. Many of my fellow owners have found this to be true regarding food and equipment time and time again. Other franchises that have a “franchisee consortium” responsible for monitoring and regulating costs of the goods and services utilized by franchisees have not only a higher satisfaction rate but are profitable as well. – (Source QSR magazine.) Of course there are always problems even in the best of systems, yet the bottom line is profitability. No one buys a business because they “like” the product. Investors purchase businesses in order to make money. In addition, there is no transparency within the company despite the fact that our franchisee’s pay extremely high royalties. Where there are royalties there should be total transparency. These restaurants are a long shot in the very best case. Yes, there are those who will sing the praises of the franchisor, but the extreme and vast majority will say that it is simply not worth the time or investment.

5) The existing business model is fatally flawed and operates for the sole purpose of making money for corporate as well as their investors.

6) Many of us have paid too much for our stores.

7) The costs keep creeping back up from the reductions announced by last year’s new administration while the suggested retail prices have either fallen or remained the same.

Our broker has decided not to sell any future Quiznos until the company changes its entire business model. Ours will be the last that he will handle until the tide truly turns.
It has been predicted by the new administration that the future for Quiznos is “bright” and that eventually there will be more “positive” stories rather than negative ones such as ours. It is a known fact that there are at least 450 Quiznos for sale on a well known web based real estate site versus only 24 Subways. Why do you think that is the case? Stories just like ours have played out and are occurring every day. Of course, Subway has its share of difficulties as well, but one thing is undeniable, a Subway does not stay on the market very long before it sells, whereas it is almost impossible to sell a Quiznos – let alone give them away as lease assumption only. Someone must be making something worthwhile at our competitor’s stores otherwise they would not be in such high demand. It is widely viewed that the “happy” owners of the future will be the ones that are either the second or third generation franchisees. When those of us who have over paid and are not able to financially continue on at our Quizno’s “volunteer” jobs have either had enough and sold for pennies on the dollar or “gone dark” the next generation – the future “happy” ones – will take over what we have built with our blood, sweat, tears and cold hard cash.

So yes, the company is accurate on one point: There will eventually be many more positive stories about which the company will boast. Those stories will come from the new owners who have purchased the deal of a lifetime and will ultimately profit from our failed investments. At the price that most of us are either walking away from or giving them away for in order to extricate ourselves from this financial nightmare called Quiznos, the next owners will actually be able to make a living from one of these stores. It is called “churning” and I firmly believe that this is an integral strategy to the corporation’s plan to make their restaurants a worthwhile investment in the future. It is simply a matter of time before we all cry “uncle” and corporate knows it.

And yes, then the next generation will truly be “happy”. Please think carefully before you invest in ANY business. Perform due diligence, talk to other owners, read comments posted on the internet, read trade magazines – anything that will help you to make an informed and objective decision. I only wish that we had known about this web site as well as the many others that I have since found in our familie’s nightmare odessy. Perhaps things would be different and life would actually be “normal”. This was a very costly lesson I hope that you can learn from our mistake.