After month of sweetness and light, dive into dark side of deals
Illustration by Jonathan Hankin
I spent last month reporting our Franchise Times Dealmakers package, relaying the good feelings and wonderful promises between franchise companies and their new investment partners. Everything was glorious, the compliments were flowing—and pretty soon a hard-nosed business reporter like me starts to feel a little bit sickly sweet.
Time for a dose of reality, when the deals go bad and everyone starts shouting. Here’s a brief tour of recent events. Thanks to the reporters and sources I’ve named below for re-balancing my world, not to mention my blood sugar.
First, the name-calling
Vintage Capital partner Brian Kahn took the stand during a trial in Delaware in February and called the directors and top management at Rent-A-Center “a bunch of crooks,” according to Law 360.
The problem was a failed merger, after Rent-A-Center terminated its merger deal with Vintage. The Dallas Morning News put the value of the deal at $1.4 billion with the assumption of debt.
Rent-A-Center terminated the agreement in December, to the surprise of Vintage officials who thought both decided to push the closing into 2019 to accommodate a government antitrust review. Rent-A-Center, the rent-to-own retailer, said Vintage didn’t respond to its letter to extend the deadline.
“It is fraud. They’re a bunch of crooks. They absolutely used this process, used this merger agreement, to come in and get everything we did” that made the company grow over the last six or seven years, said Kahn at the trial, according to Law 360.
Next the Hail Mary
Everybody’s crazy about cannabis these days, we get it. And we also smell it in every city we visit, not just the stoner pioneers of Denver and Seattle. But when a coffee shop chain with 130 outlets in Ontario, called Second Cup, says they might switch to cannabis retail stores instead, it smells more than a little of desperation. Thanks to attorney Joseph Adler, partner with Hoffer Adler, for sending this one along.
Garry MacDonald, Second Cup’s president and CEO, said the idea last fall to join with National Access Cannabis Corp. was to leverage its real estate assets “to increase value for our franchisee partners and our shareholders while maintaining focus on our primary objective of being the specialty coffee brand of choice across Canada.”
In late 2018, a group of Second Cup franchisees filed a lawsuit against the chain, saying the company misused money paid by franchisees into an advertising fund, and forced franchisees to acquire debt to fund equipment, including equipment needed to sell Pinkberry brand frozen yogurt treats. The company “failed to boost sales, and failed to take action to make up market share lost to other coffee chains,” according to allegations reported in The Canadian Press.
Wait, he said what?
Ricky Warman, owner of DMD Minnesota Pizza, a Papa John’s franchisee, was deep into deal-making with PJ Minnesota, the franchisor-owned subsidiary, to buy 31 Papa John’s restaurants, as his attorney detailed in a nomination for our Dealmakers project.
Attorney David Paris with Paris Ackerman was deep in the weeds of the deal, an asset purchase with the stipulations that each restaurant would be bought through a distinct single purpose operating entity, and following the closing, the buyers would transfer 50 percent of the units in each operating entity to a foreign investor using E2 visa investments funds.
The catch? The transaction closed “just before the John Schnatter scandals were exposed through the media. The ensuing backlash and loss of consumer support resulted in a precipitous drop-off in network sales,” Paris writes.
That’s lawyer speak for omnishambles, a word I learned when looking up clean synonyms for sh**show.
You’ll recall Schnatter allegedly used the N-word in a private session to train him in better media relations (ah, the irony), following public scuffles with the NFL, plus offered to resign but then filed suit against his board and vice versa. He finally settled, according to my colleague Nick Upton’s account. Schnatter will resign from the board, will drop two lawsuits against the company and will withdraw his bid to be re-elected to the board at the annual meeting. The company will remove the so-called poison pill it adopted in July to restrict Schnatter from communicating with other board members.
As for Paris’ deal for his client? The franchisor issued certain systemwide concessions to help offset the fallout, writes Paris, and he got busy engaging in “confidential post-closing negotiations concerning the losses specifically sustained by the Minnesota network.”
The moral, according to Paris: “A franchisor’s public conduct (or misconduct) can have dramatic impact on system economics, franchisee performance and franchise valuations.” Tru dat.
The gift that keeps giving
The latest in the string of stories about angry franchisees at Tim Hortons comes from Tim-Minn Inc., which signed a development deal so large it seemed too good to be true, at least to us jaded types. And so it turned out to be, according to a lawsuit filed by Marks & Klein, Tim-Minn’s attorneys.
The 10-count complaint asserts the franchisors “made false financial representations to fraudulently induce Tim-Minn” to sign a deal “to open more Tim Horton quick serve restaurants (262) than any other area developer in the United States,” despite Minnesota being an entirely new market for the brand.
“Tim-Minn is taking this action because it was lied to,” said Jerry Marks of Marks & Klein in a statement. “The defendants intentionally inflated the financial performance information they supplied. Tim-Minn was entitled to know the truth before it signed up to build hundreds of franchise units in the new Minnesota market.”
No doubt about that—franchisors should tell the truth. But didn’t anyone at Tim-Minn stop to think if 262 restaurants made any sense whatsoever, or were they too busy celebrating the signing of their shiny new deal.
Beth Ewen is senior editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to firstname.lastname@example.org.