November 28, 2016

Iowa Operator Bankruptcy - Part II

The previously mentioned McDonald's Operator bankruptcy has created a stir,
unfortunately leaving many questions unanswered. Following legal proceedings
can be very frustrating. The attorneys can't talk about the case and typically 
instruct their clients not to talk to anyone. 

In this environment the media can only report on what has been filed with the 
courts. And, since few civil cases go to an actual trial, there are rarely public 
proceedings to follow.

And when a civil matter does go to trail the presiding judge usually frowns on
"trying the case in the press". Trust me, I've had many opportunities to connect 
eager reporters with franchisee plaintiffs but their attorneys usually kill the 
idea. And in big-bucks litigation your attorney is your boss.

The initial document filed on 1/18/16 is only five pages long and was filed with 
the Southern District Court of Iowa and is available (with some effort) at:

http://www.iasb.uscourts.gov

To access documents on the website you'll need to establish a "PACER" case 
locator  account  on the home page which I found to be laborious but doable. 
It's almost as if the legal establishment doesn't want citizens to have easy 
access to information.

The case number is 16-02263 and is Document #14

14 comments:

Anonymous said...

The franchisees are just glorified managers with checkbooks to pay for the many McDonald’s Corporate initiatives. As another Operator said, the only thing consistent in McDonald’s today, is the Operator community. So many of the regional people have been terminated or have quit, and the same thing is happening in Oak Brook. Many of the McDonald’s field team are unhappy with the long hours they have to work and the pressure they are under. This company chews up their people, and preaches to the franchisees about how they care for their people. They do not care, as evidenced by their turnover, and the turnover in the restaurants. Other quick-service restaurants have much simpler systems with less stress for their employees.

Anonymous said...

40%-50% of Operators are in financial distress, yet McDonald’s still pushes reinvestments, relocations, and rebuilds that are NOT financially feasible. Operator equity is abysmal yet McDonald’s does not care. It’s all about the stockholders.”

Anonymous said...

MCD in recent years have not made good business decisions. At least from the operators perspective. The fact that they live off of the top line and the operators live off of the bottom line creates many disagreements. Even lower volume stores sends more dollars to Oak Brook where no dollars reach the store bottom line. A store doing $2,200,000.00 has little cash flow to the operator. However, a fixed per centage of that volumes goes Oak Brook, guarenteed. There is no such guarentee to the operator. However, we know it but we still take those stores. We don't have to take them. Poor business decisions by both the operators and the company have become common place. Years ago MCD sold their soul to Wall Street and they have got to show sales increases each year. They can do that by building low volume stores using operator credit and run promotions giving away free food at operators expense. Their top line grows. Stock price goes up. Operators struggle.

Anonymous said...

I have two low volume stores (approx $1mm sales each) coming up for rewrite. both lose money for me and do not cash flow. (Corp makes money) I have tried to get rent relief, but I have three other stores that make good money so relief has been denied. I am considering walking away from the two rewrites at lease end. Can anyone tell me what shenanigans I might expect from McD with my refusal to renew? THANKS

Anonymous said...

You must be in your 17th year on the stores to be rewritten, right? The first thing they may ask you to "consider" is to relocate them. That will cost you very near $5,000,000.00 and your rent could increase at the relocated sites. If you do this be very careful about the sales increase they project for the relocated stores. They miss those projections by wide margins and you could be stuck again with low volume stores with the new debt to service. At one million each in sales I wouldn't do it unless you get near a 250% increase in sales and favorable rent. Realize that they will not want to own them. Thus, their option would be to close them or sell them to another operator. You need to understand how this may impact you. If rewrite is near you can bet that they have discussed this situation in detail. You should make an appointment with the regional manager and the field service manager and ask what they are thinking about and that you would like to use this opportunity to get two new stores with at least average sales volume and what expectations are reasonable for you to have. They may tell you that they have studied the market and there are no good sites to relocate the stores and that a rewrite is not going to happen unless you completely reimage the stores. Your option then becomes to sell them or upgrade them. If you sell them they will do the NRBS walk through and list the reinvestments required in order to approve a sale. You or the buyer would then need to agree to do these improvements if the stores are to remain open. You will end up paying for whatever improvements are required because the buyer with just deduct those costs from the selling price. With those sales it seems to me that the only options would be to close them or sell them. If you want to rewrite them and keep them they are going to require you to reinvest in them. A lot will depend on what kind of relationship you have with them. If you are white anglo your options are very limited. If you are a minority there are several hands you can play that are effective. Always keep in mind that they have the upper hand and you will get only what they want you to get. If you tell them you are just going to walk away at mid night on the last day of the lease they will tell you to get your equipment out of their building and clean it up before they accept the building from you. If you don't do it they will do it and charge you per the terms of the lease. My advice is not to wait too long before deciding what to do. My question is, if you are not making any money why keep them?

Anonymous said...

Shenanigans you might expect: increased profitability and a certain retirement date.

Richard Adams said...

First, keep in mind that if you have five stores, you are a smaller Operator and are in the group targeted for elimination. If you were to get down to three stores the target on your back gets even bigger. Unless the remaining three stores throw off tremendous of cash that you can/will spend on the restaurants.

My concern would be the timing of future rewrites on the three good stores. If you walk away from the two losers and then have to go through the highly arbitrary rewrite process in the next 5/6 years you may get punished for your independent thinking. If your rewrites are 10/12 years in the future there's a possibility your sins will be forgotten as everyone on the corporate side will have turned over several times by then.

Anonymous said...

Richard

I tried your suggestion a lot cases came up with that number and on number 14 it did list he name of BROWN or BCDG

can you tell me what I am doing wrong?

I even gave them a credit card number

Thank you

Another question over the past several months it has been stated that close to 50 percent of operators are under water. I find that
to be extremely high. Can you put more insite into this. In our region I know of just a few operators that are having cash flow problems.
Especially with the decrease in food cost. I know what goes down must go up but right now we all are on a good trend

One more insite my neighbor operators arm was twisted to buy a restaurant that the QSCVP projected at 3M well guess what?
The first 12 months were 2.1M and MCD said "you signed up for this, you did not have to take it" Just a few months after opening the QSCVP retired.

Another example of MCD looking out for themselves.


Anonymous said...

The info. about O/O's being underwater is correct as it relates to the McD. Standards. The Point System or the 3 Finacal pillars. However It is not correct as it relates to what we the O/O would consider underwater. Now the Region will look at each operator situation and "Scrub it" meaning they will make allowances where is needed to make it work for the Company. As Far as Low Volume & rewrite your Value of the business goes down each day you wait.

Richard Adams said...

I'm sorry people are having trouble logging onto the Iowa bankruptcy court website. Of all the thousands of web sites on which I've registered over the past 20 years that one was the most difficult. I suggest you try again with a glass of good Merlot by your side.

As for Operators being "under water": there is confusion on both the corporate and the Operator side. Some think that if an Operator does not meet the McDonald's financial criteria they are failling financially. Not meeting those criteria are a far step from being bankrupt. But it appears the corporate folks don't know the difference.

Going back two years the situation was more dour but the warm winter of 2015/2016 and low commodities bailed out a lot of people.

Going forward, no matter what the weather, EOTF is going to drive many Operators right back into the ditch.
.

Anonymous said...

Thanks Dick for clearing up what I was trying to say about being under water. We need as Operators to just know that the Company will make allowances to make a deal work. The Examples I would site are Changing Required Reinvesments up or down, looking the other way on existing Cash Flow numbers or over projecting at each stage of the Pro-froma. As an operator coming and leaving we MUST do our Home Work and not get suckered. I have seen this as an operator in the last 3 months and as a Company per 20 years ago.

Anonymous said...

I'm on a committee in our coop that looks at situations where an operator is under financial stress. We determine if the problems were caused by trading area circumstances, MCD decision or operator decision. The region opened a store 3/4 of a mile from a fully eligable operator who was not offered the store. This operator was impacted by the loss of $700,000.00 dollars in sales. This is a fact. The region was told that they made a terrible mistake only to be told that MCD does not make mistakes and this was NO MISTAKE. The committee responded that we think that anytime MCD opens a new store that impacts another MCD restaurant by $700,000.00 it has to be a mistake. They don't agree. Can we assume that if it was not a mistake that it was intentional? The region did payout a lot of impact money which was completely unneccssary had they awarded the store to the closest operator. The new store that was opened at about $2,200,000.00. Decisions like this cost the system millions of dollars but it was no mistake. The new store went to a minority operator and the regional manager and the QSCVP were both minorities. Clearly, that had nothing to do with anything, right? MCD is digging their own grave.

Anonymous said...

Met to include this in the above comment. Soon after this event both the regional manager and the QSCVP were promoted to bigger jobs. This had a very chilling effect on the coop. To keep his doors open the impacted operator had to withdraw $1,200,000.00 from his retirement accounts and inject it into his business. His retirement date has been pushed forward by nearly ten years.

Does anyone think that MCD gives a rats ass?

Anonymous said...


I'm on a committee in our coop that looks at situations where an operator is under financial stress. We determine if the problems were caused by trading area circumstances, MCD decision or operator decision. The region opened a store 3/4 of a mile from a fully eligable operator who was not offered the store. This operator was impacted by the loss of $700,000.00 dollars in sales. This is a fact. The region was told that they made a terrible mistake only to be told that MCD does not make mistakes and this was NO MISTAKE. The committee responded that we think that anytime MCD opens a new store that impacts another MCD restaurant by $700,000.00 it has to be a mistake. They don't agree. Can we assume that if it was not a mistake that it was intentional? The region did payout a lot of impact money which was completely unneccssary had they awarded the store to the closest operator. The new store that was opened at about $2,200,000.00. Decisions like this cost the system millions of dollars but it was no mistake. MCD is digging their own grave.