The Fall of 3 for 1 Pizza & Wings

How did such a successful and well positioned company meet such a swift and untimely end?

My only business experience was in building the company in question. Had I been more experienced, the organization might yet have survived even the perfect storm of trouble when it hit.

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 sales staff were looking for franchisees who could afford large investments where, previously, I had been looking for hard-workers who knew how to succeed as franchise operators.

The problem, in part, was systemic. The incentive structure rewarded staff for selling as many franchises as possible to the highest bidders. I was responsible for devising that incentive structure and the blame for the mistake must fall on my shoulders.

I realize today that I ought to have put the sales staff on a commission or bonus plan that rewarded the building of long-term relationships with franchisees, rather than immediate sales. Many of the franchisees who purchased franchises should never have been sold those stores to begin with. They were not cut out for the Pizza-making business. Some struggled and others failed miserably and blamed the company for their losses. We were making enemies.

The stage was set for 3 for 1 to become a victim of its own success.

Yet, most of the problems experienced by 3 for 1 were of the same sort encountered by most businesses. Even the worst of the company's troubles were not unknown to other franchising companies. In fact, 3 for 1 managed to survive difficulties that had brought down other similar organizations (Canadian Bagel was destroyed by a franchisee vs. franchiser contractual dispute less severe than the conflicts we encountered). The difference was that, in the case of 3 for 1, all the problems hit in rapid succession. Eventually, the back of the organization broke under the strain.

The pizza franchising business is first and foremost a public-relations business. The value of the association is carried in the brand – not in the individual franchisees or even from its head-office. If that brand is sullied, every single member of the association suffers.

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.

The sympathy shown to the franchisees proved to be of very little value them.

In the franchise business, seeking press sympathy is something like making demands while pointing a loaded gun at your own head. Or like standing in a crowd of both friends and foes with dynamite strapped to your chest.

But once a complaint has reached the press, the gun has already been fired and the bomb has already exploded. The only question is who will suffer, and how much.

The franchises in dispute with head office thought that bad publicity for the company was going to help them. Little did they know that the Media was only interested in using them. Once the media was involved, it actually made the issues they had with head office all the more difficult to solve -- as the media encouraged the conflict to continue! The media would callously destroy the investments of the franchisees they claimed to support just to sell a few more papers.

And that is precisely what happened.

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: Our lengthy waiting list for new stores suddenly became much shorter. But the bad press also impacted sales, and those problems only increased as the decade continued. After 2001, 3 for 1 Pizza & Wings ceased to be a moneymaking enterprise. Instead, I found myself in a never-ending battle to keep the company alive by investing my own money in its future. The company was still a good investment. If it had survived, it would have prospered.

Dropping sales produced more disgruntled franchisees and prompted more of our franchise investors to look for ways out of their contractual obligations. This resulted in additional complaints to the press, more negative stories and television news coverage, and more lawsuits.

Beginning in the year 2000, the company had to face another challenge in the form  of new laws  related to franchising -- laws that placed stricter requirements on franchise companies with respect to financial disclosure to potential franchisees.

3 for 1 made every effort to comply with these new requirements, going so far as to hire a new legal staff to maintain company compliance. However, the law provided investors with a new way to get out of their contracts without incurring financial penalties: Accusing the company of white-collar crime.

Under normal circumstances, such allegations by parties involved in heated contractual disputes would not have produced criminal charges. To understand how a matter of contract law ended up in criminal court in the case of 3 for 1, it is necessary to remember the prevailing atmosphere of the early part of the decade, which was dominated by fallout from the collapse of Enron, the scandal-ridden bankruptcy of World-Com, corporate theft at Tyco and even the imprisonment of America's "diva of domesticity", Martha Stewart. The reputation of corporate North America was never lower. White-collar crime was on the mind of everyone.

Everyone including the press and the police.

When several of investors approached police investigators, complaining of corporate fraud in the wake of media stories alleging the same, those allegations were given credibility such claims would never have otherwise been granted.

I and my poor call-center manager were officially arrested. Thankfully, we were spared the "perp walk". We were actually under arrest for no more than ten minutes and were released from police headquarters in five minutes. No fingerprints. No seizing of computers. No seizing of documents. No "evidence" taken at all. Nothing.

All very strange.

What there was was a news release.

Just one hour later, I saw on the Police Station news: "Executives of 3 for 1 arrested for fraud". Of course the newspapers picked it up. The whole country picked it up.

Contrary to some less-than-honest media reports, the charges against us were not dropped in exchange for payment to alleged "victims". Our case was thrown out of court. It was thrown out of court at the preliminary hearing. It never even went to trial. The crown prosecutors were visibly embarrassed by the blatant perjury committed by those they called to the stand. After less than five days of testimony, the chief prosecutor stood and informed the judge in open court that the crown had been "misled" by its own witnesses.

Unfortunately, no apology to my staff, or me could bring back our ruined reputations – and the media continued to pursue us like criminals.

The monies we paid to former and prospective franchisees we paid as the result of lost civil cases. I still maintain that we were not in breach of our legal obligations in any of these cases. But with any justice system, perfection cannot be guaranteed. With enough allegations you are bound to lose a judgment sooner or later.

Unfortunately, by this time, the company was in free fall. Sales had almost disappeared. No one wanted to buy pizza from a company they did not trust. Landlords would not even rent space to us. The value of the brand had been destroyed. There were no more franchises to sell. Existing franchisees were desperate to get out. Our shops were closing down and boarding up and their owners were going belly-up. That meant more lawsuits as former friends and associates desperately tried to recoup losses before the dying company became a corpse.

The sheer numbers of these cases were what counted against us most. One civil judge openly acknowledged that, though the testimony against us had failed to prove persuasive, he was convinced that "where there was smoke, there was fire". I

n my old country of Iran, we also have a saying about smoke and fire. We say, "When a jungle burns, it burns the wet wood along with the dry."

A fire was started in 3 for 1. Once it began, it made no distinction between the guilty and the innocent -- and many innocent people who would never otherwise have been harmed were personally destroyed when those flames flew out of control.