MidiCi tale lands in bankruptcy court
Three years ago, Menchie’s frozen yogurt CEO Amit Kleinberger gambled against conventional wisdom and started selling franchises for a new pizza concept before opening a single company store. He lost the bet and filed for Chapter 11 bankruptcy protection on September 21.
Starting in 2015, Kleinberger sold more than 500 franchises for MidiCi, a Neapolitan pizza brand he created, and predicted that hundreds of them would be open by now. Instead, Kleinberger peaked at 36 units early this year.
Since then two, in Houston and Fort Collins, Colorado, have closed; two others, in Ohio and Missouri, were sold to new operators; and several more stores hailed by Kleinberger’s public relations team as “about to open” halted mid- construction.
“It’s a rolling train wreck,” said attorney Steven Greene, of Matthews & Greene, of Alpharetta, Georgia, who is preparing litigation for “pools of over 100 MidiCi’s franchisees” including many that paid franchise fees and never opened. “Kleinberger and his team did not do due diligence,” Greene said.
“Instead of building a company store and replicating it, they let their initial franchisees be their test cases. Their estimates on buildout costs, operating costs and expected revenue were grossly inaccurate.”
Kleinberger said, “Our FDDs clearly stated that we did not have a company store until June of 2015 and that our concept had not been proven because we had no franchise units open. They did not sign their franchise agreements remotely; they were sitting in our corporate unit, in Sherman Oaks, California. But they said they loved the concept. We would have loved nothing more than for sales to be stronger.”
In its 2017 FDD, MidiCi reported that total 2016 revenue for the Sherman Oaks store was $3.4 million. Kleinberger said they realized that sales in franchised stores “were less than we thought they would be” sometime in the summer of 2017 when six or seven MidiCi units were open. “We put a full hold on selling more franchises,” he said, “and did not file an FDD in 2018.”
By then, about 170 franchisees had signed on to build one to five units. Kleinberger said he formed a franchise advisory council of staff members and operating franchisees to research strategies and tactics to improve the brand.
Council members held conference calls with franchisees who had not found locations yet and suggested they hold off on building their stores. This February, MidiCi’s sent waivers to franchisees that were open, offering to stop collecting royalties and ad monies if they agreed not to sue the franchisor.
Brandon Gawthrop, who also operates 13 Wingstops, said even without paying royalties he is still not making money at the MidiCi unit he opened in Katy, Texas, in May 2017. The restaurants are expensive to build—the one he visited was beautiful, with upscale fixtures, Italian tiles and two golden wood-burning pizza ovens—and franchisees must bring in at least $1 million in revenue to cover their costs, he said. “My wife and I signed on for five, but we’re sticking with one right now.”
Franchisee Troy Renfrow said he is “making some money” at the MidiCi he opened in Kissimme, Florida, in late 2016 and is “getting close” in the second restaurant he opened in Daytona last January. But he has no plans to open in the three other territories he paid for.
Kleinberger said he and his business partners have taken no salaries or expenses from MidiCi and are working six or seven days a week to increase franchisees’ bottom lines. The company collected over $8 million in franchise fees in 2016, but paid out over $6.2 million to franchise brokers.
“They never should have hired brokers,” said Gawthrop, “because they sold way too many units. They should have tested their concept out first, then opened franchises slowly. So far, the only people making money out of MidiCi’s are the brokers.”