HTD 500 Chapter 30: ARTICLE 30 BUYER BEWARE


Department
Hospitality and Tourism Management
Course Code
HTD 500
Professor
David Martin
Chapter
30

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Article 30: Buyer Beware
Potential franchisees approached Doug Fisher two years ago for advice about an unbelievable
ground floor” opportunity that was going to make them millions. This is a tragic story and
great example of why you must ensure the franchise system your buying into has a proven track
record of success.
The Situation
Potential candidates were going to become the first franchisees of a new upscale quick-
service concept in GTA
Concept had never been developed or market tested by franchisor (had not build a
corporate store)
Doug’s Opinion
Suggested them to:
never buy into an untested and unproven concept
wait a couple of years until the franchisor had built and operated 2/3 successful
units before getting involved
noticed the disclosure document that franchisors didn’t have the relevant experience and
expertise to develop and support the chain
they had never operated a similar style QSR
market study was weak
didn’t include traffic patterns
didn’t gauge the demand for the mall where the restaurant would be located
didn’t look at the office and residential demand in the area
didn’t show any area demand generators that would support the business during the
day
concept was modelled after several successful, similar QSR
product offering was not unique
potential candidates also lived in the area the business was going into and they believed in
its growth and potential
franchisees suggested that the figures were conservative
The Phone Call
10 months after opening, Doug received a phone call from the franchisees telling him
things weren’t working out
They were broke and facing bankruptcy
Had sold their house to pay off the mortgage because they couldn’t afford it
Used remaining equity to fund operations
Had to loan money from family member and small business loan from the bank that they
couldn’t pay off
Franchisor was head tenant which was owed rent, royalties and ad-fund contributions
Doug’s Recommendation
There was no valuation to be completed
Restaurant had no value as it couldn’t even cover its costs
Could not change the concept b/c they were not the head tenant on the lease (had no
rights)
Look for legal preparations for the sale (no restaurant value)
Franchisor took the property back and paid off their investment with the loss of value
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