For some AAMCO ‘zees, party’s over
Whenever a private equity firm buys a franchise, the champagne corks fly. But what happens two or three years in, when the excitement dies and for some, all that’s left is acrimony?
That’s what 33 current and former franchisees of AAMCO Transmissions are claiming, representing 47 AAMCO franchise locations. Of those, 37 opened after American Capital purchased a controlling interest in American Driveline, AAMCO’s parent company.
“A lot of our clients have lost hundreds of thousands of dollars, and they’re going for bankruptcy,” says Jonathan Fortman, the Florissant, Missouri, attorney pressing the claims.
Fortman says his clients are far from the first to suffer after new investors buy their system. “Here’s the problem: I don’t think the private equity firms fully understand how a franchise system works. They look at the bottom line number of the franchisor,” he says, “and they think they can use their sales power to jack up the number. They forget that as part of that they have to support the franchisees.”
Many such deals do succeed, of course, but this case shows would-be dealmakers it’s not always a smooth ride.
For American Capital, a publicly traded private equity firm, and American Driveline, complaints from a few dozen franchisees are a very minor wrench in the works. AAMCO is the world’s largest chain of transmission specialists, with 900 units in North America.
The franchisor has already crushed Fortman’s efforts twice. Fortman originally filed a class-action suit in 2013, but withdrew the case after AAMCO filed its motion to dismiss. Then mediation began, but last October those talks ended with Fortman’s clients getting nothing. Now Fortman is trying again, filing Soto and Furlong v. AAMCO et al. last November on behalf of multiple franchisees.
Rich Kolman, general counsel for American Driveline and AAMCO, based in Horsham, Pennsylvania, declined to comment for the record when reached by phone, but sent an email: “We believe this new lawsuit is completely without merit for the same reasons we showed in our motion to dismiss the prior case, and we will establish that in court if necessary.”
Fortman claims the plaintiffs’ trouble dates to March 2006, when American Capital purchased AAMCO for $112 million. American Capital already owned AAMCO’s long-time rival Cottman Transmission, and its original goal was to merge the two under the brand name AAMCO. Franchisees howled, so American abandoned the plan.
More serious problems appeared on the balance sheet. As a result of financing tactics made in connection with the deal, “AAMCO has been left insolvent, which has had a very significant negative impact” on the franchisees, Fortman claims. He calls 2012 audited financial statements attached to the 2013 franchise disclosure document “very troubling,” specifically the reclassification of uncollectible notes and accounts receivable, mostly for royalties.
AAMCO booked a loss of $12.8 million for fiscal 2012, and the allowance for that bad debt ballooned, from 25 percent in 2005 and 19 percent in 2009, for example, to 56 percent in 2010 (corrected from 18 percent as first reported) and a whopping 74 percent in 2012.
“At best, the reclassification reveals a franchisor that lacked any fundamental knowledge as to the financial viability of its franchisees, and ultimately, the franchise system as a whole,” Fortman writes. “At worst, it’s an indication of blatant fraud intended to mislead as to the health of the AAMCO franchise system.”
‘I get nothing’
Mitch Cobb, an AAMCO franchisee in Baton Rouge, doesn’t much care about numbers on some corporate balance sheet. His beef with his franchisor is visceral.
Cobb is one of those former Cottman franchisees told to switch brands to AAMCO after American Capital came in. The two were arch-rivals. “If you had to say the word AAMCO, it would be followed by ‘Spit, spit, get the taste out of my mouth,’” Cobb says.
He finally gave in and switched to AAMCO, after watching Cottman franchises drop below a rumored 300—he says franchisees could never find out for sure how many remained.
“Next thing I know, just 15 minutes outside of city limits, there’s a brand new AAMCO center being opened up,” Cobb says. “Good Lord, you should have seen this place. It was a palace. It was gorgeous.” But his hands were tied—he had first right of refusal as a Cottman franchisee, but not with AAMCO.
His situation turned dire when another center opened in a nearby city, and the center started angering customers with what Cobb calls unethical work. “I sent an email to everybody who had a title at home office: ‘Would someone please, please, please come here and do something about this guy in Baker, that is killing our reputation. I send this appeal to home office and I get nothing.”
Cobb still has one center, down from two, which is doing OK. He was on a payment plan to his franchisor, working off a balance that topped $24,000 at one point, but stopped paying last August when mediation began. “I need help. I need help from the people who put me in this situation,” he says. “And let me tell you something—they are not interested in helping.”
Fortman isn’t one to give up, and he knows such cases can drag out for years. He points to the case of Contours Express, a fitness chain, which was bought from its founder in 2006. He filed 52 cases on behalf of franchisees starting in 2007. Seven years later and he’s won a $1.3 million judgment for the first eight of those, and is now going through litigation with the insurance companies.
He watches so many private equity firms buying franchises, and wonders how they’ll work out. “I think they’re unsuccessful more than not,” he says, adding the AAMCO case has plenty of highway ahead. “The message we want to get across: If you’re not careful, we’ll affect your bottom line. I have no intention of not going forward.”
Beth Ewen is managing editor of Franchise Times. Send interesting legal and public policy cases to firstname.lastname@example.org.