What would you do?

Pizza Shop Talk The Think Tank
1

This may be long but I need some input. Here goes…

Back in December I bought a local franchise pizzeria inthe midwestern US. There were a few years ago about 20 of these around, now it is down to 12. The owners sold it to me on Land contract for $36,000, I put $8,000 down. They told me and showed me paperwork that said they made a “$60,000 PURE PROFIT” per year. I they also showed me their paperwork that showed their food cost and labor goals well within the franchise goals of 36% (food) and 20% (labor) The sales they showed me were about $2,500 a week. (For comparison I learned later that the Little Ceasers down the block that does about 16-17 grand a week. A Dominoes across the street that does 10 grand a week and a Jets down the street that does 13 grand a week)

Within 2 weeks it was clear that the numbers were not accurate. Food cost was in the mid-40’s! Sales slumped to the $2000/week range though mostly aboput $2100 or $2200. I have plugged away and plugged away. Customers have come in and told me complete horror stories about the place. I found out that I am the 8th owner in it’s 11 year history. I found out that at least 2 of the former owners were dealing dope out of the place. I found out that the reputation in the area is horrible. On top of that a new local indie store is opening soon in the area. I am sure there is some way I could have found this out by better due diligence but I am not sure how exactly.

Our pizza, by corporate recipe, is the only pizza in the entire area that uses both bottom and top cheese (60% bottom/40% top) with the ingredients that we are supposed to use the pizza is not very good. I figured that radical change was the only thing that could work. We barely use the business name in any advertising. No logos on anything. We switched to pure 100% whole milk mozzarella. I also use a better quality ham and use a fresh lettuce, carrot, cabbage mix for my salads.I use only fresh stuff now not the old rotten nasty stuff the old owners used. I use my own homemade flyers and menus that corp. gets mad about but it is not plastering the tainted company name all over. I got the black book and have used the million dollar letter. Kamron Karrington, in his seminar, said that the average store gets about a 10.5% return on these. I get about 5%. The franchise also borrowed my black book to check it out and now all of the other stores are doing it too and most of them get a worse response than me. However the cusotmers we do get in we do a great job on customer service with them. Also I scrapped the bottom/top cheese thing and now only do top cheese if they get extra cheese. The pizzas look 1000% better and no one complains about not getting enough toppings (because the toppings were covered by cheese on a really ugly looking pie) We get at least 5 or 6 calls a week now from people who took their pizza home and loved it so much they called to compliment us. We have maybe 1 complaint a week about the pepperoni being no good (we use margarita pepperoni which I personally will not eat because it is too spicey and greasy) but corporate threw a complete fit when I tried out Hormel, even though customers loved it and told me so.

Deep breath, ahh…onward,

Financially I am ruined. I have worked almost all the hours that the store is open (53 hours a week open and I work 45-50 of them) and not made one single penny. I am slave labor. The store would have closed a long time ago if I had to pay someone to work those hours. But as I am working at the store it is not possible to go get myself a 9-5 job to pay the bills so I have lost my home back to the bank and have buried myself in debt that I have no real hope of repaying in the next 5 years.

Now one of the employees that I have (who also worked under the old regime) is telling me that sales now are MUCH higher than they ever were under the old regime. She said she felt sorry for me becuase my son was at the store one day recently and was crying because he has to have pizza everyday because I can’t afford to buy food for us and he is not sure where we are going to live and is scared by the whole situation.

I borrowed the $15,000 for the downpayment of $8000 and then inventory ($800) First months rent and deposit ($2900) about $1500 to do some very needed improvements in the store and then $750 for flyer drops in the first few weeks I owned the store (which got exactly ZERO response)

I was subsequently offered $5000 to walk away by the owner of another franchise store that the former owner is working at. He would then give it back to her (I heard that she is or was sleeping with him) But that will not cover the $15,000 I owe for the downstroke let alone the money I have paid on the land contract so far. So I list the store for sale but all I get are offers to take over the land contract and walk away with zero in my hand or offers in the high teens low twenties. I spoke to the franchise owner and he told me to “make sure the numbers look right and nothing is out of line” I asked him what he meant and he said “well if food cost is 45% and labor is 35% no one will want to buy the store” and then said “all anyone can ever get from me is the numbers that you give to me” I then replied that “but the numbers are what they are, how do I make something look good if it doesn’t?” He paused for a long time and then said “well be careful but make sure they look good” AHAH! Now I know what the happened to me. I have subsquently spoken to several other owners in the chain. No one is happy. Everyone feels like they got ripped off buying their store. They all bought in the past 2 years. Apparently it is a real merry-go-round of owners coming and going.

That all being said I have all of my friends telling me to sue the hell out of everyone. One cop buddy of mine said that he thought it was a conspiracy to defraud and that it was actually criminal. I am about an inch away from suing and the person who loaned me the 15 grand is pushing me hard to do so. The employee who worked for them is willing to testify and is going to meet my lawyers this week and do an affidavit. I am told that if the former owners can’t prove they made the $60 grand they showed that they would be in trouble. I am sure they can’t. It is impossible for them to. My attorneys say my chances of winning are about 100% or better. But the former owners are probably uncollectible. Now what? Well sales are steadily improving. We are doign things the way I want to and the only corp gets their royalties but everything I am doing now is as I want to do it. Guess what sales are climbing. We had two weeks in a row over 2500 and one week over 3000. The hot snap right now is hurting us but that is pretty much expected during the 90+ degree days. I think I can keep working and get this to about 3500 a week in the next 5-6 months.That would be about the one year mark. Granted I will have lost everyhting I own, but at least I can maybe sell it for a few more bucks or actually make money at it. Not sure what to do. I get motivated on good days and horribly depressed on bad ones. there are some days I swear I just wish I had a gun and 1 bullet. I cannot stand defeat and I feel like I have lost it all.

Sorry for the long-winded-bare-my-soul-even-though-we-just-met rambling on and on and on and not very cohesive post but I do not know what the heck to do. What would you do?

Todd

PS if I think of anything I forgot I will edit my post

2

Why are you still paying royalties if you suspect they were part of the deception? Check with your lawyer to see if they are keeping their end of the contract.

3

File bankrupcty and move on…lawsuits rarely ever pay… and the mental toll of engaging in that type of lawsuit is much greater than you may think.

Get a job and move on. If the bank took your house you might as well file bankruptcy anyway. Your credit has already taken a hit…

Don;t worry…life works out even when the tunnel is dark…

Regards,
JOHN

4

Sounds like you need to cut your losses to a minimum and position yourself to move on with your life, with or without that pizzeria.
I just read your entry once, and if someone will buy your position for $5000 where you put up $8000, you would be out $3000, and that may be a minimum loss.

  Sounds like you are building it back up, and may want to.  You may be able to negotiate and purchase from the franchisers that would be fair, especially if you could proove some wrong doing on there part.

Speak to some local respectable business people that are not connected to it. There are probably lots of possibilities.
good luck,

Otis

5

Todd,
brother i feel your pain i have been open 3yrs and still get depressed on the slow days

i would stop paying the royalties and change the name put under new owner new menu what ever but seperate yourself from that franchise or do to them what they did to you show them #'s that you want to (i.e. you only did $1,000 in sales i know they track your commisary but use another supplier for 3/4 of cogs beat them at thier own game :twisted:

i am in idependent but we looked at a dozen fran b4 we decided to go it alone i had 10yrs with dominoes

keep the faith and look up instead of down :lol:

my kids get tired of pizza everyday also thats why i added spaghetti & steaks to the menu :lol:

if you need someone who is there also lets get in touch

small town guy trying to survive also

6

Thanks for making me feel better about my situation. Sorry, but I’m hitting tough times as well, but not near as tough as you.

If they indeed claimed you would make $60k in profit, you can and will win a lawsuit. Only a complete moron would represent the potential income of a business they are selling. Everyone is probably right. You will win, but good luck collecting.

Don’t go out and hang a new name on the building (yet). Talk to your lawyer. Put your FRANCHISOR in default. Give them the required days to “cure” (usually 30). At that point you may legally terminate your contract. Put up a new name, and go for it.

That is, if you still want to stay in the business.

If you have already lost your house, and you just want out, just close the doors, go get a different job. Take anything you can with you.

It sounds like the $15k loan may have been from a friend or family instead of a bank. If that’s the case, you can’t walk away from that, but you can probably tell them that you have to give up the business, and will pay them back as soon as you get on your feet.

I used to have my kids sleep in the back room, but I always had hope of better days. Your story breaks my heart.

Good luck. I know you are facing a hard choice.

7

If Todd was taking over an independent shop, would you guys advise differently as to whether he should carry on or not? Considering the big boys around him are doing 10k and above it sounds like a good area.

8

I would say the first step is getting the royalty monkey off his back.
It sounds as if he is heading in the right direction as far as sales go. As an indy you have the opportunity to drop what doesn’t make a good profit or change the way you do things to make it more profitable.

9

Todd,

 As you see from the respones, there are many possibilities.

For one, I recommend you put your profile up on the board, that way, we can e-mail you and get a better picture of what you do and you a better picture of who we are.

For instance, the link to my webste is below, and is on my profile where other people have their’s also, along with other pertinent information.

Otis

           [http://homepage.mac.com/otisgunn/PhotoAlbum27.html](http://homepage.mac.com/otisgunn/PhotoAlbum27.html)
10

Right now, the franchise is getting you nothing. You’ll have to stop using their recipes (dough, sauce), but so what… The question is whose name the lease is in. If it’s in the franchisor’s name, you can’t keep the building. Otherwise, sever your agreement and move on. NOTE: There’s probably something in the agreement that says you can’t open another pizza joint within x years. Therefore, you need a LEGAL way to sever the agreement (breach of contract, etc).

Be careful of lawsuits – only one party ever makes money – the lawyer.

11

Todd,
You are indeed in a tough situation. Having been in a similar financial situation at one point with a past pizza restaurant, I would suggest one of the following.

  1. If you have already lost your house and don’t have anything else to lose, and you want to walk away, just do it. Close your doors one night, take everything that isn’t bolted down and sell it at used equipment place for cash to get you by.
  2. If you want to keep the place, you need to ditch the franchise name and the agreement. As others have suggested, find a clause in it that will get you out. From what you said, there is ample evidence to give a notice to cure to the franchisor. They will probably do nothing. At that point, you rip down anything that was that name on it. You will need to have your own recipes and suppliers. There are lots of resources on the internet for recipes.
  3. Make sure your lease has your name on it, not the franchisor.
  4. If you borrowed money from family or friends, you’ll want to have a plan on how to pay that back if you do walk away.

My 2 cents–I would drop the franchise agreement and go it alone, assuming you have good rent and you personally have a good name in the community. Create a completely new name, new recipes, new products. Read this board daily for ideas and advice. Attend workshops or conferences as you can afford them. Make sure you have a solid business plan based on where you are right now. Create 1 year and 3 year financial projections using an Excel spreadsheet or simply do it on paper. Post that plan where you will see it every day and live by it. Get your family involved–your own kids can be “free labor” if you need to.

Good luck! Email me if you would like more details.
Joe

12

Was this store owned by the franchisor or another franchisee when you bought it?

It sounds like you bought it from an existing franchisee. Some comments on here are focusing on the franchisor, but your biggest beef would probably be with the previous owner, not the franchisor. It sounds like they are the ones that misled you. Do you have previous sales records (prior to your purchasing) or tax returns? You can probably get past invoices from suppliers and prove they misled you on the cost of goods.

Actually, I really hope you have the previous tax records. Those should show that there is no way they turned a $60,000 profit on $2,500 per week in sales.

As for the franchisor, did you receive a UFOC and Franchise Agreement prior to buying? It seems like the franchisor may not have everything together. If you didn’t receive an up-to-date UFOC, then you don’t own a franchise at all… and you can probably strip their name and products without reprucussion, regardless of who holds the lease. The UFOC must also include AUDITED, current financial statements from the franchisor.

You also mention that corporate “threw a fit” when you used Hormel pepperoni. Well, there’s a difference between throwing a fit and having a legal way to stop you. Does the FA state what type of Pepperoni you can use? If not, start using whatever you want. They can’t legally stop you from doing anything if it isn’t spelled out in the Franchise Agreement. Change the menu and product as much as you want while remaining within the FA.

I have to be honest, this doesn’t sound like the most reputable franchisor. That’s probably good for you, as they most likely don’t have their legal house in order. You can probably find more than a few ways to get out of their agreement (assuming it was legal to begin with) and go on your own. And make sure that UFOC was in order, because really, without that you don’t even own a franchise and you’re already an independant. I’d take the signs down tomorrow if that’s the case.

If you want to go the legal route against the previous owner it sounds like you have a pretty good case there too. You have the statements from the franchise owner, statements from employees that worked under the old store owner. Finding out their true numbers would be as easy as serving subpoena for the royalty payment information. The paper trail is there if you were defrauded.

13

OK folks for clarification…

I bought the store from people, not the franchisor. THey sold it to me as a going business.

I have found a supplier that has records from the past few years and the former owners did in fact purchase goods from this supplier and it was not reflected in the info I was shown when I bought the store.

The UFOC I got was old. The franchisor indicated that the new one was in the process of being prepared. The financials were there but they were from several years ago.

I have spoken to a few other owners, they have been in the franchise for a year and a half or less. They are also trying to sell their stores. That means that at least 4 or 5 out of 12 stores is currently for sale. Sad part is that the same could be said last year.

The landlord has some friendship or relationship with the former owner. My lease is up at the end of the year. He said he would not renew it. If I sell the store he will give the new owner a lease for 3 or 5 years, but will not renew it for me. I pay nearly $20/sq ft. That includes taxes and insurance but not CAM. I am responsible for that. The landlord is not responsible for anything except the 4 walls and the roof. Everything else is on the tenant (me).

The franchise agreement does mention that I have to use his recipes and ingredients. It also says I can’t work for or open another pizzeria. The last guy that left the franchise lost the right to his phone number and the right to make a certain size pizza that we are known for. He stayed in business for a few months but is closed now.

I spoke to one of the other owners last night. We agreed that there is something wrong with the system when no one is making money. The top store int he franchise does about $7000 a week. Number 2 does about $5500 a week. The average is about $4000 a week. Hardly anyone is making a profit from what I understand.

Bankruptcy is not an option. There is a long story behind it but let’s just leave it at that.

Keep your thoughts coming. I do appreciate it.

Todd

14

If you can’t renew the lease, and you can’t sell, you are done. Walk away now. Don’t waste 5 more minutes of your life on this endeavor.

Contact a lawyer and start suing. The former owner, the franchisor, and if the landlord participated, him too.

You say bankruptcy is not an option, well, your screwed in either case then. Best to get out and get a job that PAYS so you can start paying back.

Sorry, I am normally an optimist, I would usually say keep at it, but you paint a picture with little or no hope. If you can’t renew the lease, what do you do in a year when you get sales rolling? So many stores for sale, and you are honest, who will BUY a money looser?

RUN! Run fast!

There are lots of profitable pizza shops looking for passionate, determined managers. If you love the business, you could have a future that way, and make a living for your family.

15

Also sounds like there is collusion between the former owners and the landlord. You might have a legal argument there, including possible fraud charges on the people that materially misrepresented the business to you.

I agree with driverx, pull the ejection handle and go while the gettin’s good.

16

Can someone explain a land contract? I’m not familiar with that.

Is there a franchise owners association? Or is everyone independent? Seems that maybe you’ll should get together to speak to the franchisor. Basically I don’t see why they would be against making SOME changes in an effort to increase sales and add royalty money.

What is the reason given for not renewing the lease?