Attorney cites ‘half-baked concept’ as key reason for MidiCi’s stumble
Illustration by Jonathan Hankin
Amit Kleinberger, the CEO of frozen-yogurt chain Menchies, was bullish when he talked with me about his new fast-casual pizza concept, MidiCi, in August 2015. He saw a “tremendous opportunity” in the space despite a long list of much bigger competitors. In fact, he wished the other players well. “How can you be No. 1 without having a lot of No. 2’s?” he said at the time, confidently reserving the top spot for MidiCi.
Fast forward to September 21, 2018. That’s when MidiCi’s outside attorney, Eric Riess at Lathrop Gage, sent to franchisees a six-page letter, the first five of which detailed the company’s efforts to make the brand work.
The MidiCi team “spared no expense” to develop its products and concept, investing “substantial amounts of its own money with no external bank borrowing,” the letter said, such as $200,000 for its initial architectural services and over $350,000 on the initial culinary phase.
‘In plain English’
MidiCi’s initial franchise disclosure document “fully disclosed in plain English that the MidiCi concept was brand new,” the letter insisted in multiple places. “Every prospective franchisee knew that the concept had not been proven. It was clear in the FDD.”
The letter soon also made clear that MidiCi was a bust, with in-store sales nationwide “still significantly less than desired.” MidiCi decided to contact franchisees and tell them to “hold off on developing their store or hold off signing a new lease until answers were found to the sales/profitability questions.”
In a process the letter called RSFSP, franchisees whose rent payments exceeded a certain percentage of sales were offered “royalty and marketing support,” meaning they were allowed to stop paying royalties if they signed “a complete release of claims against MidiCi.” But the letter said “further and astonishingly,” some franchisees were making negative allegations about MidiCi “even though they fully participated in the RSFSP” and signed that release.
“The bottom line is that, at this time, no one can explain the reason why the MidiCi concept is not fully resonating with consumers the way we all had wished,” the letter said, going on to intone: “A new business comes with risk. That risk was willingly shared by MidiCi with its franchisees.”
And then in the very last sentence on the bottom of page 5 came the bombshell: MidiCi was filing for Chapter 11 bankruptcy reorganization. In my line of work, that’s called burying the lead.
A ‘disingenuous’ letter
“What a disaster,” said Andrew Bleiman, an attorney with Marks & Klein in Chicago, about MidiCi. He had been preparing for arbitration proceedings with his clients, husband-and-wife franchisees with no restaurant experience in the Pittsburgh market who bought a five-unit deal, when the Chapter 11 filing came.
As his clients’ process unfolded, a total initial investment Bleiman said was pegged at $722,000 at the high end, including $100,000 for working capital, “was proven to be $1.2-, $1.3-, $1.4-” million to get a restaurant open, and their lender canceled the loan before it closed.
Such experiences were repeated “across the board” among franchisees, Bleiman said. “MidiCi was constantly making changes to what they were doing. It was totally a half-baked concept.
“They were having franchisees sign 4,000-square-foot leases, on the notion that these stores were going to do $2 million-something in sales, and what’s happening is the stores are doing barely a million bucks in sales—and they’re 4,000 square feet!” Bleiman claimed.
As for the RSFSP process described in the letter, Bleiman scoffed. “Basically people were purportedly trading off multi-million dollar claims, because some of these people have lost well over that, and in exchange they get $60,000 in royalties” forgiven, which he called “some meaningless result. But apparently most everybody signed, so there are only two stores paying royalties.”
Bleiman blasted the tone of the letter, calling it “disingenuous.” “He’s basically trying to blame the franchisees for everything that’s gone on. He really is trying to say, ‘Look, we told you it wasn’t proven…and yet you did it all anyway.’ It ignores the fact that if it wasn’t ready, why’d you start selling franchises?
“They had sold 500-plus units, and only 30-some opened, and some of those have closed,” Bleiman said. (See related story on page 61.) “They didn’t do what they needed to do on their end to vet their concept, to the tune of 500 franchises times about $40,000 per franchise” in fees. “You’re talking about $15 million in initial franchise fees, without really any stores open except the one.”
As for the Chapter 11 bankruptcy, and the accompanying stay of all claims while the case works through court, Bleiman says simply: “We’ve claimed fraud. Fraud is not dischargeable in bankruptcy, so we’re going to pursue our rights.”
Committed to making it work
In an interview, a subdued Kleinberger disputed the Item 7 (initial investment) and square footage assertions, saying the FDD is accurate but some franchisees chose to stray from the real estate and other guidelines or neglected to subtract tenant improvements from their opening costs.
He says he will stick it out. The Chapter 11 reorganization plan “is not a plan just for six months. We’ve put a years, a years-long plan of how to continue funding the business and helping the brand reach its max potential.”
Asked if he regrets how he went about selling so many MidiCi units before testing the concept, he replied, “It’s not about we regret or not regret because we were all excited about it. We all felt it’s a brand that is worthy. Here we are, and we are committed to making it work.”
Beth Ewen is editor-in-chief 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.