However, that sky grew a bit cloudier when the franchisor – with fewer than 20 locations open – was hit by a franchisee lawsuit.

Incredible Pizza Company Franchise Group, LLC is being sued by area developer FEC Holdings, LP, and its related franchisee entities for fraud, negligent misrepresentation, price discrimination,violation of relevant state consumer protection and business opportunity laws. breach of contract and the implied covenant of good faith and fair dealing.

The complaint filed by America’s Incredible Pizza Company franchise owner Lloyd Robert (Robin) French, III alleges “As a result of Defendants’ breaches of their affirmative legal duties to Plaintiffs, Plaintiffs have invested over $46 million in family entertainment centers that operate at a substantial loss.”

Jillian M. Suwanski of Baker Donelson Bearman Caldwell & Berkowitz PC has written an article on the case, and on the effect that the Quiznos franchisee settlement may (or may not) have on it and other franchise supply chain disputes.  (See Quiznos settlement sparks franchisee focus on supply chain disputes).

Writes Suwanski:

Incredible Pizza requires its franchisees to purchase food and supplies from particular vendors and has entered into national and regional contracts with vendors for food, supplies and merchandise. The plaintiffs allege that Incredible Pizza “solicited and accepted payments by third-party vendors” which were “in fact, kickbacks which have not been paid for services rendered in connection with the sale or purchase of goods, wares, and/ or merchandise.” As a result of the “kickbacks,” the plaintiffs argue that they were “restricted in their choice of and access to independent vendors and consequently have paid prices for goods, wares, and/or merchandise, and other products that were higher than they would have paid in the absence of [Incredible Pizza]’s kickback scheme.”

The plaintiffs also allege that Incredible Pizza had agreed in the Area Development Agreement and disclosed in its Item 8 that “it would not accept any vendor rebates, commissions, and kickbacks as a result of franchisee purchases from required suppliers, other than a 10% markup on proprietary items and [a] Coca-Cola rebate.” The rebates were more extensive than the 10% markup and the Coca-Cola rebate, according to the FEC plaintiffs, resulting in a breach of the Area Development Agreement and rendering the Item 8 disclosures false.

The Incredible Pizza case was recently transferred from the Southern District of Texas to the Western District of Missouri, and Incredible Pizza filed an amended Answer in mid-March. It will be worth watching how the case progresses. Because of the settlement, the Quiznos cases did not set any formal legal precedent on which franchisees can rely. However, the franchisee friendly results of the Quiznos settlement should make franchisors cognizant of the risks of inflated prices and rebates and any perception that improper “kickbacks” are being received.

Vendor rebates, even when properly disclosed, are often perceived as “kick-backs” and are one of the most contentious areas of the franchisee – franchisor relationship.

Franchisees ask:  why do franchisors believe that it’s acceptable to profit from the purchases of franchisees – and to intercept funds that could either be passed on to franchisees or deposited in the systemwide advertising fund?

Aren’t most franchise opportunities marketed with “group buying power” being a key benefit?

Isn’t the implication that the franchisor derives its income from the franchise fees and royalties and that the benefits of group buying are passed on to the franchise owners?

Poor Strategic (Greedy?) Decisions Can Stunt Growth.

The America’s Incredible Pizza Company website states the goal of donating millions of dollars to Christian missionary groups.  Unfortunately, at the present time those funds will be needed for a legal battle with its own franchisee.

If this potentially incredible pizza franchise fails to reach its lofty goals and stalls out, the cause will likely be traceable to two (in our humble opinion) bad decisions:  Selling pie-in-the-sky Area Development agreements and keeping vendor rebates.

Read the initial complaint (.pdf format): FEC Holdings, LP v. Incredible Pizza Franchise Group, LLC, 2009-cv-03289, S.D. Tex. (October 9, 2009)

Also read: Incredible Pizza” Franchisee Loses $46 Million (Blue Mau Mau)

WHAT DO YOU THINK?  SHARE A COMMENT BELOW.

Answer:  Not much. 

SmartMoney.com surveyed franchisees from different franchise chains regarding the cost to them of some current and recent promotions. The Smart Money article points out that franchisees generally bear the brunt of a promotions’s cost, including the food, labor, rent and utilities, among other things.

Here’s the Little Caesars HOT-N-READY pizza promotion, which report a $.90 profit per $5 pizza:

Little Caesars

Promotion: HOT-N-READY Pizza – Get one 14-inch large cheese or pepperoni pizza for $5 at participating locations.

Pre-promotion price: $10.99 (one large one-topping pizza)

Promotion Price: $5

Bottom line for restaurant: Profit of roughly 90 cents a pizza

Introduced six years ago, Little Ceasars [sic]HOT-N-READY Pizza promotion offers 14-inch cheese and pepperoni pies for just $5. Even though some stores charge about 55 cents more than that, margins are still slim. The cost of a single pizza’s ingredients and packaging amounts to about $3.50, according to a franchise operator in Georgia. Tack on another 60 cents for rent, labor and utilities and franchisees earn roughly 90 cents a pie. Little Caesars’ spokeswoman Colleen Kmiecik says the company’s own calculation on per-item profitability differs from those provided to us by franchisees, but she declined to provide specific figures. She also says the company provides long-term profitability information to its franchisees to show how the promotion will boost their bottom line, but would not provide further details.

RELATED POSTS:

SUBWAY: What Do Franchisees Make on $5 Footlongs?

LITTLE CAESARS: What Franchisees Make on a $5 Pizza

McDONALD’S: What Franchisees Make on a $1 Burger

BASKIN ROBBINS: Franchisees Lose $1.45 per Scoop on Promo

QUIZNOS: Franchisees Lost $2.25 per Sub on Giveaway

BURGER KING Franchisees Sue Over $1 Cheeseburgers

WHAT DO YOU THINK OF LITTLE CAESARS PROMOTIONS?  SHARE A COMMENT BELOW.

The Bellacino’s Pizza franchise was listed as the 10th worst for SBA loan defaults for 2008.  According to Katie Adams of Investopedia:

10. Bellacino’s Pizza

If you’re a Facebook user, you can become a Bellacino’s Pizza “fan.”

Unfortunately 26% of Bellacino’s owners that took on SBA financing couldn’t get enough regular fans to stay current on their debt payments.

That number closes in on 30% dating back to 2000.

Source: Investopedia

ARE YOU FAMILIAR WITH THE BELLACINO’S PIZZA FRANCHISE OPPORTUNITY?  SHARE YOUR THOUGHTS BELOW.

In our recent post 15 Worst Franchises by SBA Loan Defaults, 5 of the 15 franchise concepts with the highest rate of SBA loan defaults for 2008 were pizza franchises. 

The Simple Simon’s Pizza franchise was listed as the 7th worst.  According to Katie Adams of Investopedia:

7. Simple Simon’s Pizza

Simple Simon’s grew from one store in Tulsa to a network of 220 restaurants nationwide since 1982. However, nearly 30% of store owners who took on an SBA loan to finance the start-up have defaulted. Perhaps selling pizza isn’t quite so simple after all.

ARE YOU FAMILIAR WITH THE SIMPLE SIMON’S PIZZA FRANCHISE OPPORTUNITY?  SHARE YOUR THOUGHTS BELOW.

The recent Unhappy Franchisee post 15 Worst Franchises by SBA Loan Defaults listed the franchise concepts with the highest rate of SBA loan defaults for 2008. 

Figaro’s Italian Pizza franchise was listed as the 4th worst.  According to Katie Adams of Investopedia:

4. Figaro’s Italian Pizza

Figaro’s has been in business for 28 years, but most of its franchise owners aren’t likely to reach that same anniversary.

One-third defaulted on their loans, unable to grab enough of the industry’s $32 billion in annual revenues.

ARE YOU FAMILIAR WITH THE FIGARO’S FRANCHISE OPPORTUNITY?  SHARE YOUR THOUGHTS BELOW.

Our recent post 15 Worst Franchises by SBA Loan Defaults listed the franchise concepts with the highest rate of SBA loan defaults for 2008.

Noble Roman’s Pizza franchise was listed as the worst.  According to Katie Adams of Investopedia:

1. Noble Roman’s Pizza

Billing itself as “The Better Pizza People,” this Indianapolis-based franchiser has had a tough time selling that proposition to customers.

While the company reported a 30% net income increase in Q1 of 2009, Q2 total revenues were down more than $500,000 from the comparable period in 2008.

Maybe that’s why 53% of all owners with SBA loans defaulted in 2008.

ARE YOU FAMILIAR WITH THE NOBLE ROMAN’S FRANCHISE OPPORTUNITY?  SHARE YOUR THOUGHTS BELOW.

The company was still a good investment. If it had survived, it would have prospered.  Anthony Reza Solhi

According to numerous press reports and dozens of alleged victims, Anthony Reza Solhi is a predatory con man who preyed on the hopes and dreams of recent immigrants, drove a Porsche and bought a mansion with an indoor pool with their life savings.  According to the 2007 CTV.ca article Taking Your Dough:

According to dozens of families – mostly newcomers to Canada — Solhi took their life savings and left them with nothing but untold debt and empty bank accounts…

…Dozens of cases revealed he had been at this scheme for years – first as 3-for-1 Pizza and Wings, followed by Pizza One, Pizza Uno and Anthony’s Kitchen. It appears Solhi has been up to no-franchise good for nearly 10 years.

After police charged Solhi, in 2004, with 25 counts of fraud involving 3-for-1 Pizza, victims thought they would recover their losses. A year later, the government dropped the charges against Solhi in exchange for paying $500,000 to some of the franchisees… But many of Solhi’s victims haven’t seen a penny.

…After close to twenty unpaid civil judgments against Solhi, totaling more than $1 million, Solhi is still trying to sell franchises.

FranchisePick.Com reported on the Solhi controversy (The Latest U.S. Import: Franchise Fraud, Another Pizza Franchise Scam Victim comes Forward), as did Michael Webster’s THE BIZOP NEWS.  In fact, alleged victims of Reza Solhi maintain an entire website, Anthony’s Franchise Information, dedicated to negative news stories about the man they say scammed them.

But now Anthony Reza Solhi is fighting back.  Solhi has launched an aggressive blogging campaign to tell his side of the story:  That he is himself a victim of a predatory news media and misguided, unscrupulous franchisees.

Is Anthony Reza Solhi the REAL victim?

Solhi’s personal website, titled Ideas by Anthony Reza Solhi, begins with the statement that Solhi is owed a debt of gratitude for inventing the concept of delivering chicken wings with pizza:

Next time you enjoy a pizza and wings combo from the local delivery service, thank me! Anthony Solhi.

In 1989, I started a small pizza company in Toronto, Canada, called 3 for 1 Pizza and Wings, the first chain to offer both pizza and wings for home delivery. Within 14 years, that little company grew to a nation-wide franchise with outlets from coast to coast. Its growth rate was unprecedented in the pizza home delivery industry. Many of its menu innovations would be copied by competitors, both in Canada and in the U.S., altering the way we eat in North America. These are minor achievments but I remain proud of the innovations I’ve left to the pizza home delivery industry and even of my small contribution to America’s fast-food palette.

This is a personal Web site I maintain. It tells a little of my story and contains information about the history of 3 for 1 Pizza and Wings. I periodically update it with commentary on business and franchising issues and responses to specific claims made with respect to 3 for 1 Pizza and Wings.

Reza Solhi’s blog contains his autobiographical account of how he, through hard work and innovation, built the fastest growing pizza chain in North America. 

It also tells how the rapid collapse of his enterprise, as well as criminal and civil charges, were the result of many factors, none of them directly attributable to him.

In his section The Fall of 3 for 1 Pizza & Wings, Solhi blames his franchise department for picking bad franchisees:

With the company growing so fast, I was unable to remain involved in selecting franchises. That critical task was left in the hands of our franchising department. Unfortunately, with this change, the company started bringing in, not pizza-makers, but trouble makers.

The foolish franchisees went to the press with their complaints, a decision which eventually toppled the company.  Writes Solhi:

As our company’s first decade in business came to a close, we found ourselves embroiled in an internal dispute sparked by company efforts to reduce employee theft (the food industry’s biggest cause of lost revenue). The disgruntled franchisees took their complaints to the press, and this became our first encounter with bad publicity. The Toronto Sun featured the dispute in a series of articles that were sympathetic to the franchisee cause, and which portrayed the company’s executive branch as being of questionable character. ..

Bad press hurts not just home office but every single hard-working franchisee affiliated with the company.

These first stories put an end to our efforts to expand into the U.S. and dried up much of the interest we had from prospective buyers in Canada…

As short-sighted franchisees began demanding their money back, Anthony Reza Solhi likened himself to George Bailey in It’s a Wonderful Life.

Anyone who has ever watched George Baily defend the New Bedford Building & Loan Association knows what happens when investors suddenly get it in their heads to demand their money back.

On a separate blog (Anthony Reza Solhi’s WordPress Blog) Solhi claims he is also being victimized by vindictive, extortionist franchisees who threatened to ruin him if he did not pay them off.  Writes Solhi:

For two years or more, I have been the victim of an Internet-based effort intended to ruin my reputation and destroy my capacity to earn a living. One man, Gautam Malik (together with his wife, Nidhi Malik) has been the principle force behind this relentless attack… Sitting in my office, they told me in the most serious tone, that I would either refund their money or they would see to it that I was financially ruined. I remember their words to this day; “You better pay back our money or we will ruin your life and your business.”

…It is not enough for them that the company I loved and nurtured was destroyed and that I lost my fortune, my home, and my family; the Maliks are still unsatisfied. Four years after the Maliks came to see me that day, Gautam Malik and Nidhi Malik continue to pursue their personal vendetta against me.

ARE YOU FAMILIAR WITH ANTHONY REZA SOLHI?  WHAT DO YOU THINK?  IS HE A PREDATORY CON MAN OR A VICTIMIZED & MISUNDERSTOOD VISIONARY?

graphics source:  Ideas by Anthony Reza Solhi