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Surviving a System Bankruptcy Bankruptcy for the corporate office nearly meant disaster for these franchisees.

By Sara Wilson

entrepreneur daily

Opinions expressed by Entrepreneur contributors are their own.

When Gail and Gordon Perry, now 54 and 56, respectively, first opened their Schlotzsky's franchise in February 1999, they saw it as a security for their retirement. Little did they imagine what was in store for them nearly six years later. In August 2004, Schlotzsky's Inc. filed for Chapter 11 bankruptcy, sending business spiraling for the Perrys, who had trouble convincing their San Luis Obispo, California, community that they were still open for business.

The situation has steadily improved since the company was purchased in December 2004; however, the Perrys won't forget those five grueling months anytime soon. We spoke with Gail about the measures they took to keep the business afloat.

How did you first hear that Schlotzsky's was filing for bankruptcy?

Actually, my employees told me before I even heard it through the corporate office. They knew before I got notified. That was kind of a surprise. My landlord read about it, and she started getting phone calls from customers, so I was concerned about the customers thinking that my store went bankrupt.

Were you expecting that it would have an effect on your business?

Yes, most definitely. We were very concerned. Extremely concerned--scared of what was going to happen to our store. Once we heard, it was instant. Our sales dropped 25 percent, and, all of a sudden, we couldn't get our product.

I'm sure our distributors were fearful, too, of what was going to happen. Instantly, they made us go to COD, which was hard. Then they just stopped carrying products that we had bought for the last five and half years. We couldn't get our cups; we couldn't get all of our meats. So I went to Smart & Final and got my meats, which weren't the same, but you still have to service your customers, or you're going to lose even more. Then the distributors came back and started giving us meat, but it wasn't quality meat. It was completely different meat. The whole thing was really awful. We were a wreck.

Did you ever imagine that you would one day be faced with such challenges like finding another source for your products?

Never. You pay royalties so you think you're fine. It was really trying, but we got through it. We're actually still suffering from it, but we're starting to feel we're out of the woods. New owners bought [the franchise system], and they've been absolutely wonderful. They're doing what they can to help us out.

You say you're still suffering from the bankruptcy. Can you explain how?

Sales dropped 25 percent when it first happened. They're improving, but they're not up to where they were when the bankruptcy hit. That's why I feel like we're still suffering from it. I would say sales are still down about 12 percent. I don't know if I can blame the bankruptcy totally for that, but you're going along just wonderfully and then everything just stops. It's like day and night, and your sales drop $300 a day, and then you keep hearing, "Oh, I thought you were closed" when you're out in the community. I would say that was the worst part. People aren't aware that we're independently owned.

Did you ever feel as though you might not survive?

Heavens, yes. And then we heard through the grapevine that if they didn't find buyers by December 31, the bankruptcy court was going to close the store. I don't know if that was true, but we were thinking, "Where does that leave us at the end of the year? What happens then?" We didn't know. It was very trying on us and scary. We have our whole life in this store. Our retirement is in this store.

It was fortunate that you had been in business for several years before this happened. What do you think would have happened if you had just opened your business?

We would have closed. My heart goes out to all these franchisees who were fairly new and still learning the whole thing. There were over 700 stores, and now we're down to about 430. So that's a huge drop in stores. And I'm sure a lot of those were new franchisees, and they just couldn't weather it. In the first two years, you're learning the whole thing, so everything is more costly. You have more waste, you have more help until you learn the business. Once you learn it, you can cut back on all that. Your waste becomes minimal along with your help. We started out with 44 people and now we're running it with 20. That's a huge difference in payroll.

Looking back, were there any signs that the franchise was going bankrupt?

We should have seen it to begin with, because the former owners were taking our advertising dollars but they weren't advertising. They were telling me, "You can advertise, send in the bills and we'll pay you." But I had heard through some of the other franchisees that they weren't getting paid, and I was thinking, "I can't afford to pay twice for advertising." So I didn't advertise.

Did you receive any support from fellow franchisees?

If you have several stores together within driving distance, you can kind of share. If you run out of something, you can run over to that store. Well, I am really way out here on the central coast, and the closest store is probably three hours away. So the one thing that really helped me tremendously was I always kept enough supplies for two weeks, because my delivery truck would sometimes be short or maybe my flour wouldn't come, and it's not like I can run to the neighboring Schlotzsky's. Because of that, I got through a lot longer than some of the other franchisees. And actually some of the other franchisees were willing to come to my store to get stuff, and I was thinking, "I don't know if I can part with it," because, honestly, we didn't know if were going to get any flour. We didn't know if we were going to all these [supplies] that are all Schlotzsky's labeled.

What actions did you take that ultimately helped you survive?

In the beginning, the local paper ran an article on the bankruptcy, and they didn't really make it clear that it was the corporate office that filed bankruptcy. So I contacted the local newspaper and told them they needed to let [people] know it's not my store. So they ran a wonderful article, which was really helpful.

Also, my local Coca-Cola supplier came through for me. They stocked extra stuff for me knowing I might need it. The manager of Smart & Final would always say, "Can I order you extra meat? Whatever you need ..." So because I went to them and explained the situation, they went the extra mile, whereas if I hadn't said anything, it might have been more difficult. So just letting your local suppliers know what is going on helps. I even told the manager at [the local grocery store,] Vons. And whenever I went in for something, he would take me to wherever it was. And that just made it not so bad.

Is there any advice you can offer to other franchisees going through the same experience?

Let the people who can help you know what's going on--even the people who are surrounding you, let them know what's going on, so they're not guessing and thinking you're going to close your doors any minute. Try and get what information you can from the corporate office, just so you're not in the dark. You don't want to be guessing from week to week what's going on.

Do you ever worry that it might happen again?

No. I think these new buyers are in it for the long haul. I feel very positive. The new owners figure that the franchisees who were able to survive will see a definite change by the end of the year, and I believe them. They're doing everything that they can to make it easier for us. They've been really great. My husband and I are really pleased with the new owners.

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