You're Toast!

Franchise owners thought they'd make a fortune serving the toasted sandwiches created by Quiznos. Instead, they got burned.

Starting in December 1998, Horowitz argued, the Schadens spent millions of dollars of the company's funds -- money generated by the public's investment -- to retain investment banks, financial consultants and lawyers to craft a private takeover. Then, in 2001, they proposed a merger in which they would buy the remaining Quiznos stock at its market value of $8.50 a share. They didn't put out an offer to see what other investors would pay for the company, and they refused Fagan's offer to buy Quiznos at $15 a share. They did, as required by federal securities law, send stockholders a proxy statement explaining the transaction.

Missing from that November 5, 2001, notice, however, were many telling details. For instance, a projection for store sales and openings in future years failed to acknowledge that the company had already exceeded those numbers. There was also no mention of an upcoming Super Bowl sponsorship and commercial. Nor did the document explain that Quiznos was selling all of its corporate stores in favor of franchisee-owned stores, thus eliminating the up-front risks by requiring individual owners to pay capital costs. Most significant, the statement did not disclose plans for a food subsidiary that was expected to generate $15 million in annual profits as soon as 2002.

Instead of simply licensing suppliers as the company had done in the past, American Food Distributors would now purchase Quiznos products and sell them to franchisees at a markup. In 2002, AFD alone generated a $20 million profit.

Toasted bread wasn't enough to keep Ratty Baber, Chris Bray and Bob Baber from struggling with their franchises.
Toasted bread wasn't enough to keep Ratty Baber, Chris Bray and Bob Baber from struggling with their franchises.
Attorney Ted Bendelow represented Quiznos franchisees.
Anthony Camera
Attorney Ted Bendelow represented Quiznos franchisees.

On January 8, 2004, after 24 days of testimony, Judge Robert McGahey Jr. ruled that the fair value of each share was $32.50. He awarded the stockholders the $24 difference per share, plus interest and attorneys' fees. "The 'true status' of Quizno's as a company on the verge of a growth explosion was obviously known to the Schadens," McGahey wrote in his judgment, "but they told other shareholders little, if anything, of substance concerning that potential growth explosion.... I find the proxy statement to have been an exercise in obfuscation."

Suits from other bought-out shareholders, and the Schadens' ex-wives, soon followed.

By the time that ruling came in 2004, the chain had surpassed 2,500 stores, and Lambatos, who stayed friendly with Rick Schaden after selling out, had been present for many of the openings. He'd even been the official face of Quiznos.

In 2002, the company's ad agency was looking for a spokesperson who could sell their toasted subs, and after seeing footage of Lambatos catering a cocktail party, executives decided he was the ideal Chef Jimmy, a character so obsessed with creating the perfect sandwich that he let everything else in his life go -- including his pants. The first spot aired on national television during the 2003 Super Bowl.

Lambatos relished his time in the spotlight and spent the next year traveling to store openings, making appearances and promoting the brand. "That's when I realized what Rick had done with the franchise over the course of the fifteen years I'd been away from it," he says. "Looking back on it now, I don't think I could have done what he had done. His business savvy and what he wanted to do with the company was so on track, with producing the best sandwich you could possibly eat and doing it with better quality products than anybody else in the market, and in that time frame of the '80s and '90s, when people were looking for fresher, better-quality products." By late 2003, the Chef Jimmy ads were replaced by new spokespeople -- and creatures (see story, page 19). Lambatos went back to admiring the sandwich chain from afar while he ran his own business, stopping in at Quiznos for a Classic Italian a few times a month.

Quiznos was receiving national industry recognition, and by 2004, it had been ranked three years in a row by Nation's Restaurant News as the fastest-growing restaurant chain in the country, both in number of stores and sales. In 2005, Quiznos was number two on Entrepreneur Magazine's Top 10 Franchises list, and QSR Magazine ranked Quiznos third in its list of Top 50 Chains, for its increase in sales. Last year, Quiznos was still the fastest-growing restaurant chain in number of stores.

These distinctions -- noted in the company's marketing materials -- are not aimed at wooing customers, but potential franchisees: "Hungry to Be Your Own Boss? It's Easier Than You Think..."

An online seminar -- the first step toward becoming your own boss -- plays like an infomercial promising financial freedom after an initial investment of approximately $279,500. That includes a $25,000 franchise fee to Quiznos, plus all start-up expenses -- from advertising and training to equipment and construction -- paid to approved suppliers or affiliates.

"You don't have to be highly skilled or highly educated."

"Ever made a sandwich? You're qualified to own a Quiznos."

"We'll support you every step of the way."

"You are never alone."

"We want you to succeed."

"The American dream is owning your own Quiznos."

Until recently, required reading for new franchisees brought home that point. McDonald's: Behind the Arches, by John F. Love, tells the American success story of McDonald's and Ray Kroc, who bought the burger joint from the McDonald brothers and grew it into the most successful franchise ever. He created a lot of millionaire owners along the way.

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