The Securities Division of the Indiana Secretary of State issued a press release this week announcing that it filed an administrative complaint against Florida based Mac and Cheese Franchise Operations LLC and its parent company and owners (“MACFO”), the franchisor of the I Heart Mac & Cheese franchise restaurant concept. According to the complaint, MACFO is accused of pushing an unprofitable business model and misrepresenting to prospective franchises the start-up costs to open a location. None of the three locations in Indiana are still open and operating and the rest never opened. Indiana accuses MACFO of entering into franchise agreements with seven franchisees to operate 16 locations in the state.
Last year, the Indiana Securities Division issued a cease-and-desist order that revoked MACFO’s registration on file that would allow it to continue offering and selling new franchises in the state. In revoking MACFO’s registration, Indiana found that MACFO’s “failure to file materially sufficient disclosures rendered Indiana investors incapable of making informed decisions about investing in [MACFO].” No less than 44 Franchise Disclosure Document deficiencies were listed including: (1) failing to disclose required litigation; (2) failure to disclose executive background and biography information; and (3) misrepresenting the profitability and demand for locations. The state is now pursuing MACFO on behalf of the aggrieved investors.
There are two lessons here. First, we often counsel start-up and emerging systems. We almost always recommend that the brand have multiple profitable and successful locations before deciding to grow using a franchise business model. The founders of MACFO opened up their first and only company-owned location in Florida in 2016 and then started franchising almost immediately in geographies far away from their Florida homebase. While there are certainly exceptions, this is not often a recipe for success. There needs to be a track record and history and genuine proof of concept. After a brand creates up-and-running profitable business outlets, it should then: (1) analyze start-up costs and proposed initial franchise fees; and (2) factor in ongoing royalties and other continuing fees, to anticipate whether the concept will be profitable for franchisees. Once the concept is launched, then it is often prudent to grow centrically from the original locations where the area is known by the franchise team and easier to support.
Second, we all understand that Franchise Disclosure Documents are voluminous and dense. It creates a time-consuming obligation on the business executives and owners to compile the information so attorneys can draft an accurate, complete, and compliant FDD. While the Estimated Initial Investment Chart in Item 7 and the biographies provided in Item 2 may seem formulistic to some, it is critical that all sections are completed in a thoughtful and precise way. It is important to ask clients renewing and updating their FDD to pay particular attention to the estimated initial investment and whether line items should be increased as a result of inflation. We did the same during COVID when supply chain issues and delays were increasing costs. If franchise systems owners cannot take the time to work with their legal counsel to create an accurate FDD that is not misleading or deficient, then they should think long and hard about whether they have the time to run a franchise system.
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