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Finding Franchise Heaven and Avoiding Franchise Hell

Franchises offer opportunities but also pitfalls, so buyer beware

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Owning a franchise is always hard work, but here’s how to avoid the hellish pain and reap the heavenly rewards

David and Carla Lehn were first-time franchisees who hoped that by purchasing the only Quiznos fast-food restaurant on Kauai, they could supplement their income with the profits. Three and a half years later, they’re still at least a year away from making any returns on their investment.

“It looked like it was going to be a really good deal at the time and, at that point, we felt like the economy had shown signs of improvement,” says David Lehn. “We didn’t go looking for it. It was actually owned by a friend of ours.

“It’s a business that we continue to invest in, but we haven’t made any money. Our biggest success is that our doors are still open.”
The Lehns’ story is a cautionary tale about buying a franchise. Many people have successfully made their living from franchises in Hawaii, but others have lost their entire investment.

Quiznos is one chain that has a poor record in the world of franchising. From 2008 through 2010, nearly 1,900 of 4,633 Quiznos franchise locations closed their doors nationwide, according to the company’s 2011 franchise disclosure document. By 2006, four class-action lawsuits had been brought against Quiznos Franchise Co. LLC and other related parties for alleged excessive supply and food costs, misuse of the marketing and advertising fund, and royalty disputes with franchisees who signed agreements, but did not open their restaurants, according to documents and other information on the Quiznos national settlement website.

Though Quiznos denied any wrongdoing, a settlement valued at $206 million by an outside franchise expert hired by lawsuit attorneys was reached in 2010, in which thousands of current and former franchisees received monetary compensation and food and supply discounts, and were forgiven royalty and marketing-fee debts.

Today, the national company is under new ownership with a plan to improve company branding and franchisee relations.

While Lehn admits that his location and the weak economy have contributed to his difficulties, he also believes systemic problems with Quiznos franchising are to blame.

“It was because of some things that were happening at the corporate level. They thought at the time it was a good idea to change the brand to compete with other restaurants,” he says. “They had deeply discounted meals, other things they thought would continue to bring people into their locations, but Quiznos was supposed to be an upscale fast-food restaurant. The whole business was based on providing a better-quality, fast-dining experience. When they made those changes they thought would improve operations; it backfired on them and it backfired on us.”

Success Not Guaranteed

To aspiring and experienced entrepreneurs, a franchise might sound like the perfect way to be one’s own boss while minimizing risk with an established brand and proven business model.

“A lot of people think (franchising) is a good idea. They think, ‘This is my ticket to being rich,’ ” says Steven Egesdal, partner at Carlsmith Ball LLP’s Hawaii office, who works in franchise law. “The problem with that is it actually takes a lot of money and resources, and it’s also a huge investment of time and energy. There is no guarantee for success.

“The biggest mistake (franchisees) make is not anticipating how much work it’s going to be. I think when people buy a franchise, they think a lot of the work is going to be done for them. … All they’re given is the picture frame, but they’ve still got to fill in the picture.”

After owning his franchise for over a year, Henry Telles knows this well. In 2002, Telles moved to Hawaii after he was laid off from his job as a software engineer in Florida. Ten days after landing on Oahu, he took a minimum-wage job working at the first Teddy’s Bigger Burger restaurant on Monsarrat Avenue. Ten years later, he moved to Maui and became owner of the only Teddy’s franchise in the state (other Hawaii locations are company- or affiliate-owned).

“It’s not easy but it’s rewarding.”
- Henry Telles
Teddy's Bigger Burgers Maui

Photo: Henry Telles

“It’s not easy, but it’s very rewarding,” Telles says. “And just like anything in life, hard work begets the reward.”

He estimates he spends more than 100 hours a week running his Lahaina store, including the time spent cooking Teddy’s burgers at games for Maui’s pro baseball team, Na Koa Ikaika Maui. “It’s almost like having a second location,” he says.

Telles estimates it will take four more years to make back his investment, but he’s already thinking about other locations. “People are asking when we’re opening in other parts of the island. We’d definitely look into opening other locations. … For me, it’s TFL, Teddy’s for life.”

Finding the right franchise is the most important thing a prospective investor can do, but many make mistakes and end up suffering for it.

“I hate to see people lose hard-earned money on a pitch,” says Egesdal. That’s why the advice he gives his clients often means they decide not to purchase a franchise.

“The franchisor, whether directly or through a broker, wants to get you on board. They’re in sales mode,” he says. “ … That’s why the key thing that anyone should do is the due diligence.”

For a prospective franchisee, due diligence includes thoroughly reading the Federal Trade Commission-mandated franchise disclosure document (FDD), which includes 23 sections detailing various aspects of the franchise system, from franchise fees and initial investment estimates, to a franchisor’s litigation details and financial statements.

Hawaii is one of 15 states that regulate franchises. Under the state Franchise Investment Law, franchisors are required to register their FDDs with the state every year they intend to open any franchises in the Islands.

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