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Coldstone Creamery Franchise Troubles

Two and half years ago, on franchise-chat.com, I summarized my views about the franchisor Cold Stone Creamery this way:

"There is evidence for the following:

a) system doubling over the last 3 years, each year;

b) apparently not generating cash, and;

c) showing profits by dramatic increases in receivables - interest and notes from franchisees and area developers."

This analysis was based upon reading their UFOC and financial statements in or around December, 2005.

What has happened since I made this call that Coldstone Creamery was a Franchisee disaster?

Only worse news.

Richard Gibson of the Wall Street Journal writes:

"Earlier in this decade, Cold Stone Creamery was one of the hottest franchises around. The super-premium ice-cream stores attracted scores of franchisees hungry for a piece of the "Ultimate Ice Cream Experience."

Now many franchisees are selling their stores, overwhelmed by soaring bills and shrinking profits. Some have lost their homes, broken their retirement nest eggs or filed for bankruptcy

."

What happened, asked Richard.

Well, what happened was entirely predictable from reading the financial statements of Cold Stone Creamery.

They were lending money to their franchisees because their franchisees weren't making any money.

That receivable was increasing - foreshadowing the franchisee's eventual financial ruin.

This is simple analysis: you lend money to people who cannot make the payments, you lose.

Who cares why they cannot pay you. Although the Wall Street Journal has some interesting possibilities.

When reviewing a franchise financial documents, it would be very wise to review the receivables owed by the franchisees.

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Full post as published by Misleading Advertising Law on June 16, 2008 (boomark / email).