Dunkin' Donuts Mom and Pops Squeezed Out by Private Equity Firms

Unfortunately, Asam and Cindy got in as franchisees at the wrong time, right before the "hedge fund boys" (his term for the private equity firms) took over, Jaroslawicz said. "They have created a whole new set of serfs under the guise of owning your own business. They own you if you sign those papers."

April 30, 2008

Dunkin' Donuts Mom and Pops Squeezed Out by Private Equity Firms
Janet Sparks

BROOKLYN (Blue MauMau) - A Jewish woman from Borough Park and her Muslim business partner, an immigrant from Egypt, are fighting for their livelihood after their two franchises were terminated by Dunkin' Donuts for minor infractions. According to co-owner Asam Habib, recently interviewed by the New York Post, "It's simple. We build up the businesses for them, then they cut us out so they can resell them."

Last year when his partner Cindy Gluck approached Dunkin' about possibly selling 15 percent of her business to a store manager so he could share in their success, the franchisor responded with a lawsuit. Gluck said even though she had notified the company before consummating the transaction, they told her she had violated her contract. Although she immediately withdrew her preliminary offer to the employee, it was too late.

Dunkin' filed the complaint against her in the U.S. District Court of New York, Eastern Division.

Habib and Gluck soon found themselves in the same situation as 157 other franchisees who have been sued by Dunkin' since 2006. According to court records, both of their franchises have been terminated and they are in settlement talks through her attorney David Jaroslawicz to avoid costly litigation. But Jaroslawicz feels this is Dunkin's way of consolidating its small franchises under a single, large, multi-unit franchise. He said Konstantino Skrivanos, better known as "The Greek," already owns a dozen Dunkin' Donuts locations in Brooklyn and more than 100 locations along the east coast. He said it was a "greed-driven process which threatens to eliminate the last vestiges of small business in the city's largest borough.

Dunkin' Donuts had offered them a buyout of $400,000 for the two stores they opened - stores they could resell for $700,000 or $800,000 each, according to the New York Post article. And when the partners solicited offers elsewhere, Dunkin' Donuts nixed the deals - even though the potential buyers came from a corporate-approved list, Gluck said.

Jaroslawicz said in an interview that they had also imposed a $100,000 penalty against her, but told her if she'd pay $75,000 of the penalty they would consider settlement. He said he had no idea what the penalty was for, that no one in the company could tell him, not even in questioning company officials under oath. He does know of another immigrant franchisee who was imposed with the same penalty. "These poor immigrants cannot afford to pay such amounts."

But Jaroslawicz said there is a lot more to this story, something the media keep missing. "It's really all about Dunkin' being taken private by three major private equity companies, Basin Capital, The Carlyle Group and Thomas H. Lee Partners, back in March 2006. "What these firms are doing is what they do with all companies, like Burger King and Hertz. They take them private for $2 or $3 billion, or whatever. They do whatever they can to squeeze the last drop out of them in order to get the revenues up. Then they sell off 40 or 50 percent to the public so they can double their money. When they sell off the other 50 percent, as time goes on, they make billions of dollars."

Last May, Dunkin' Chairman and CEO John Luther testified before the U.S. House Financial Services Committee, when it was conducting a hearing to examine the effect of private-equity financing on workers and firms. He spoke on the benefits of private equity for franchise systems, stating that the private-equity acquisition has "liberated" Dunkin' Brands. Jaroslawicz seems to agree. He feels the tactics of private equity companies are destroying the small mom and pop operators. "They have it down to a science. Unfortunately, Asam and Cindy got in as franchisees at the wrong time, right before the "hedge fund boys" (his term for the private equity firms) took over, Jaroslawicz said. "They have created a whole new set of serfs under the guise of owning your own business. They own you if you sign those papers."

But Stephen Caldeira, Chief Global Communications & Public Affairs Officer, Dunkin' Brands, said in an interview, "We would never pursue legal action against any franchisee if there wasn't clear cause." He didn't know about penalties being imposed on franchisees regarding infractions, but he said that he would look into it. But he did add, "I think it is a private matter. This is still pending litigation so why would we comment on that?

In regards to Jaroslawicz's comments on taking stores away from poor immigrants, Caldeira said he didn't know where that information was coming from. "We have operators of all different sizes, all different backgrounds and we are very proud of the diversity of our franchise system." Although people are entitled to their opinions, he said all he could comment on were the facts. "We think the reason we have been around for 58 years and continue to grow is because we provide great opportunities for franchisees to provide for their families, to employ people and give back to their communities. Whoever is making these assertions, I don't know where they are getting their facts from."

When the equity companies took over Dunkin' Brands, Jaroslawicz said he asked for their business plan and their exit strategy through the courts, although he knew what they were going to do. He said, "You don't have to be a genius to figure it out. I want to know their exit strategy because I know they are going to do an IPO for 20 or 40 percent of the shares. They are pushing the hell out of their people, mainly on the backs of the immigrants." In talking with Jaroslawicz this week, he said they just received the decision from the federal magistrate stating his request to receive equity companies business plan was denied.

Jaroslawicz feels the things going on in the Dunkin' system are serious enough for the Attorney General's office to get involved. "They do have a franchise division. I think if enough media exposure takes place the AG's office will have to investigate and put an end to it."

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Risks: Raining litigation, Bad luck, Pump-and-dump scheme, Indentured servants, Private-equity financing buy-and-flip, Immigrants as prey, Franchisee-on-franchisee opportunism, Race, Termination of franchisee, single, Build up the business so they can take it, Resale value set by franchisor, Resale or transfer store through franchisor to new franchisee, Resales as a profit center, Offered much less than market value of franchise, Penalty applied without explanation, Stock market pressures make franchisor push system sales higher and higher, Initial public offering, IPO, Resale permission unreasonably withheld , United States, 20080430 Dunkin Donuts

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