Schaden-Fraud?

Quiznos' Owners Accuse Schadens Of Scam

The New York Post had an article yesterday about a new lawsuit that Avenue Capital and Fortress are bringing on against previous owners, Richard and Rick Schaden. Apparently, the valuation presented to Avenue and Fortress was rife with inaccurate and inflated data. Here's more from Blue MauMau:

"'The Investigation has revealed that in connection with the 2012 Restructuring there appears to have been a concerted effort by the Specified Litigation Parties to deceive other members of the Debtors' management, certain minority board members, and the Debtors' then-existing lenders. As a result of this conduct, the debtors and the Debtors' then-existing lenders-in particular Avenue and Fortress-suffered material damage."

The reorganization disclosure statement issued to the bankruptcy court details how litigation proceeds could come from suing certain former officers, board members and related parties of the debtors. Their allegations will include how the current owners were purposely misled by former management about the prospects and financial health of the company.

It states, 'Notably, projections included in the disclosures have the company nearly doubling revenue and more than doubling EBITDA by 2019.'" Blue MauMau

Oh please. Unless the Schadens actually falsified factual information, the claims don't hold much merit. These are sophisticated lenders (Oaktree, Caspian, MSDC) and I'm sure they did their own due diligence.

What does hold merit, in my view, are the allegations made by franchisees. These are worth considering, not necessarily because there was any tomfoolery related to breach of contracts (I haven't seen franchisee agreements, but I'd imagine there's language about coupons and the "hidden fees" to which the franchisees are referring), but more because they hold they key to restructuring the business.

"In the new round of lawsuits, store owners claim Quiznos continues to overcharge by forcing them to buy food at marked-up prices from a Quiznos-affiliated supplier.

"The hidden mark-ups, which are the keystone of Quiznos' scheme, have generated massive profits for Quiznos while simultaneously driving its franchisees to financial ruin," one of the lawsuits says. Most of the suits contain similar or identical language...

The lawsuits allege that Quiznos management increased the use of coupons for free and discounted food — costs that are absorbed by restaurant owners — in order to make the franchisees buy more food at marked-up prices from Quiznos' supply affiliate.Disputes between franchise companies and their franchisees are relatively common, but few have the persistence and animosity as Quiznos'.

For example, Burger King restaurant owners sued the parent company in 2009, arguing that they were losing money by being forced to sell some menu items for $1. The suit was settled 17 months later, with both sides saying they would collaborate on future pricing decisions.

Analysts say Quiznos' friction with franchisees has created a debilitating spiral of store closures and declining revenue.

'The sales decline and the heavy couponing have really made it tough for franchisees to make a profit," said Jonathan Maze, an analyst and writer for Franchise Times magazine. "Quiznos charges a lot of money (to franchisees) for its food.'" -Denver Post

Doesn't this sound a lot like Burger King, but much worse? I believe a franchised model can be incredibly powerful, but only when the franchisees feel empowered. The franchisor should work to make sure that the stores are profitable by ensuring that restaurant cogs are manageable, providing strong marketing support, helping with logistics for flailing stores and continuously investing new product innovation to drive traffic instead of coupons. I hope that the new owners (Oaktree specifically because they're good at reincarnating business models) can do this. Hint: Take a look at Wendy's!