Can you Find Success in "Re-Opening" a Previously Failed Franchise Location?
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Recently on satellite radio I listened to a radio advertisement, allegedly, by a national franchisor promoting the resale of what I believe to be previously closed franchise locations. The franchisor is allegedly Quiznos and this morning I checked out their website relating to their promotion and sale of opportunities relating to the "re-opening" of closed Quiznos locations. Basically, the website is promoting and offering prospective franchisees the opportunity to acquire rights to own or operate closed Quiznos locations. Presented as a "low start-up cost" opportunity, the website operator makes the following "promotional" statments about this Quiznos "re-open" opportunity:
Own a Big Brand without a Big Investment.
Jump into a proven business system for as little as $12,500 down.
Own your own business in as little as 90 days.
Quinos has a limited inventory of stores available through this program.
While I readily admit that I have not reviewed Quiznos disclosure documents respecting this alleged "reopen opportunity", here is my take on this advertisement and potential opportunity:
- Understand Why the "Closed Location" Originally Failed. Franchise failure resulting in closed stores may be attributed to many factors and may not necessarily be attributed to the the Franchisor, i.e., failure could be attributed to a deficient and non-performing franchisee. However, when a franchisor possesses an "inventory of closed stores" and is looking to resell these opportunities you must question whether or not the closed stores (and especially the particular store that you are considering) may be attributed to failings or deficiencies on the part of the franchisor, the franchise system or the business location, i.e., Is the continuing royalty too high? Is the food cost too high? Is the rent reasonable? Is the advertising program insufficient? Does the location generate enough traffic? You must understand what contributed the original "store closing" and insure that the facts and legal obligations that you are undertaking are different. That is, learn from the mistakes of others.
- Your Investment Goes Far Beyond your Initial Out of Pocket Expense. When buying a franchise your investment goes far beyond "out of pocket" expenses. Although this opportunity is presented as one with limited start up costs, you must also consider the loan obligations that you will be agreeing to and assuming. While your "out of pocket" may be nominal you could be acquiring substantial debt obligations. Also, always remember that your time has value and in and of itself represents a substantial investment - especially if your store is not generating a profit.
- Don't Just "Jump In". I think that you probably know this already, but we all need to be reminded of this critical point. So, "don't, do not just jump in". Due diligence is key.
Disclaimer: Michael Webster of BizOp makes a great comment about this alleged Quiznos website and the possibility that it may not be directly affiliated with Quiznos. Michael's comment is instructive for prospective franchisees and a reminder as to why prospective franchisees must engage in a detailed due diligence process. Thanks Michael.
The site is very new, and I don't believe that it is affliated with Quiznos. Probably simply a lead generator, check back in 6 months to see if it is still around. Something very fishy about it.
Excellent advice and warning!
I'm sure that in this terrible economy this site will generate hundreds of leads that will ultimately benefit Quiznos, whether or not it is their website or the website of an agent broker, etc.. who will be paid a commission by the franchisor for the leads that are produced.
This is another angle of "churning" of failed "first owner" franchisees that could possibly benefit the second-generation prospective franchisee who has $12,500 if this franchisee can elminate the personal guarantees to Quiznos that might mean the loss of their house or other assets in the event of their inability to pay Quiznos for the loan, etc. etc. from the cash flow of the
operation of the business. Just how much is Quiznos discounting these "used" locations that have failed?
I believe it would be possible for Quiznos to loan the money and take ONLY the equipment as security for the loan, but are they doing this, or are they demanding "personal guarantees" and "long-term leases" from those to whom they will loan the funds?
Don't some of the States (like California) have laws wherein franchisors can't take the homes of franchisees if the franchisor is the lender? It is the personal guarantees on the franchises AND the leases and encroachment that are killing Quiznos franchisees -- and the higher costs of Quiznos menu items in the recessionary economy. If the prospective franchisee has nothing to lose but his time, and is willing to take the risk of losing $12,500 to "try" to earn a living, maybe this is good for both the franchisee and Quiznos?
I understand that this type of "churning" is enabled under regulation to produce a secondary market for "used" franchised business operations that does benefit the brokers and the franchisors. This obviously is why the government plays deaf, dumb, and blind as to the "managed" churning of first owners of franchises -- especially in bad times when banks don't want to lend to franchisees of franchisors who experience more than a ten percent rate of failure.
Quiznos must have picked up these stores from failed owners for almost nothing and are holding them under agreements with the Landlords or do they actually own the leases or the locations?
Quiznos, of course, has nothing to lose and is trying to retain their gross sales figures with their attempt to keep as many stores up and running as possible --- with cheap labor, of course.
But what can the franchisee lose? This is the big question and will they recognize the trap of the "personal guarantee" and the long-term lease and the "termination" clauses? Will they recognize and understand the implication of the acknowledgement and reliance clauses in the unilateral contracts where franchisors make sure that they have legally promised hardly anything at all to the prospective franchisees.
Due Diligence is absolutely necessary and with an attorney and a CPA who will reveal the traps of the contract and the feasibility of the investment.
Let the buyer beware of franchisors who sell "proven" franchises but who do not have to prove how often they work to the prospective buyers because of the subsidy of dishonest and ineffective federal and state regulation of franchise sales!
As previous Quiznos franchisee, I can tell you that if you go for this scam, you need your head seriously examined!!!!
Charles,
Fantastic post. Amazing, huh?
The Franchise King®
Joel Libava