Tale of a Closed Round Table Pizza

Franchises aren’t all fun and games and wild beyond imagination riches.  The road to financial freedom and family happiness is littered with former franchisees who have lost everything, or at the very least lost something, like the following tale of the owner of a North Orange County Round Table Pizza.

This particular Round Table unit was open many years and was a popular fixture in the community.  The longtime owner had decided to sell after many years of successful operation.  By the time he was ready to list the business with the brokerage that I was working with at the time, he was an absentee owner who was struggling to turn a decent profit.

Round Table Signage

Struggling to make a profit does not naturally make a good business opportunity that can command a significant asking price.  In this case though, it was absentee run, so there was upside potential.  Side note: Never underestimate the power of a quality hands-on owner who is present to make the business run smoothly and profitably.  This Round Table location showed the typical signs of an absentee owner: employees not fully on their customer service toes, attention to cleanliness details lacking, general lack of enthusiasm in the atmosphere of the store, quality of the product slipping just a bit.

Fix all these things as an attentive, energetic owner operator and you are in position to see a significant turn around in the health and profitability of the business.  So, if the price was right, the store was worth buying.

After languishing on the market with little activity for many months, the seller agreed to a price reduction significant enough to induce an offer from a buyer with previous experience managing a chain of franchised Burger King restaurants.  The motivation for the buyer was clear, he had successfully managed a big name franchise chain of restaurants, and he saw immediately that this particular store was a prime turnaround candidate that was well within his skills and capabilities.  So was there a happy ending?  No.

The price wasn’t the real problem, the buyer and seller negotiated back and forth and eventually settled on sale terms.  Was Due Diligence the Problem.  Not really, the buyer knew what he was getting into, there was some haggling over memorabilia decorating the location, but it was eventually agreed upon.   So if Negotiations and Due Diligence did not kill the transaction, then what did?  What killed the transaction was the Franchisor Approval Process.  Specifically, the seller’s worry that the entire approval process of the buyer was going to take too long, possibly four (4) or more months and it wasn’t 100% guaranteed that the buyer would be approved.  The buyer was confident that he would qualify with the Franchisor, given his financial background and his direct management experience with Burger King.  However, early in the buyer application process with the Franchisor, the seller decided that risk of the approval process going awry was more than he was willing to take, so he closed the store!  Yes, he had a well qualified buyer in place, no bank loan approval needed, and terms agreed upon.  Yet, he still pulled the plug, citing the uncertainty of the Franchise Approval process.

The outcome: the seller turned down the chance to collect money for his business and the buyer, myself and my brokerage wasted a lot of time, the franchisor lost a unit, which is not good for the brand’s reputation.

What are a few morals to the story.

• For buyers, make sure the seller is prepared and committed to running the business better than ever during the escrow and franchisor approval process.
• We’ll never know for sure, but, it is quite possible that this seller anticipated the business going into the Red from break even during the escrow and franchisor approval process, and did not want to take more money out of his pocket on a monthly basis in case the franchisor approval was denied or the buyer got tired of waiting to be scheduled into training by the franchisor.
• Time is a deal killer.  Though Negotiation and Due Diligence were ultimately settled, there were little things here and there that prolonged both, which affected the seller’s mood and perception of how long the entire transaction would take.  Lesson learned, don’t waste time on trivial matters and kill the momentum.
• Uncertainty of Franchisor Cooperation.  This is key, when buying an existing franchise location, the Franchisor needs to approve the buyer as a franchisee AND it needs to approve the transfer.
• When a franchise agreement is transferred, franchisors often request capital improvements to the unit, whether it be new signage, new furniture, or new menu boards, etc.   Capital improvements obviously cost money, and the seller may have anticipated that he would have to contribute financially to the costs.  Again, this may have turned off his enthusiasm to sticking it out
• Even when you do your homework, and the fit seems right, outside forces can wreak havoc, and adding more third parties to any transaction such as a franchisor adds to the number of outside forces that are not in your control.

For more information on Franchising and how Just Elementary, Inc. can help you, call (323) 213-9193 or email cs@justelementary.com