Franchisees call out franchisor
By Jonathan Maze
As published in:
Franchise Times - February 2009
Jeff Phelps had so much success with the Geeks on Call tech support franchise he bought in 2002 that he quickly amassed 10 territories in the Washington, D.C., area, making him one of the system's largest owners. By 2004 he had 13 technicians and $1.6 million in revenue.
Today he has twice as many franchises, thanks to a purchase of 10 troubled units in Chicago, yet last year his business brought in $800,000 in revenues, and employs just four technicians.
"I'm barely hanging on to it," Phelps said, "and it's not just the economy."
Phelps isn't the only Geeks on Call franchisee struggling. He was one of 10 franchisees who filed separate lawsuits against the franchisor in a single day in early December - six in federal court; four in a Virginia court.
Those lawsuits, along with numerous company financial filings and interviews with former executives, paint a picture of a system that, like Phelps' franchise, has been in a steady decline from its peak three years ago.
Geeks on Call seems to be teetering on the verge of a financial collapse, according to auditors who expressed doubt about its ability to stay in business. The company lost $5 million last year amid a 27-percent loss in revenue and a 60-percent increase in expenses, according to the company's annual report. Executives say the company needs financing to last beyond six months.
The lawsuits, which are similar, claim Geeks is "insolvent." The company's financial problems have kept advertising firms from dealing with either the franchisor or its local owners, said Patrick Blasz, the franchisees' Virginia-based attorney. In a press release, company officials denied the allegations and claim revenues for many of the franchisees filing lawsuits have grown.
Geeks' General Counsel Mike Baumgartner said many of the franchisees had previously been told they were in breach of their franchise agreements. "We know that many of these plaintiffs have been more focused on disparaging the company than on building their business," he said. "Unfortunately, their disparagement harms the company and the Geeks on Call franchise community as a whole."
Booting up
Geeks was founded in 1999 after Mike Joynes, a trial lawyer, became frustrated when he couldn't find technicians to repair his office computer. The company grew quickly, and Joynes decided to franchise. He brought in Richard Cole, former president of American Outdoor Advertising, as CEO; and Walter Ewell, an experienced franchisor with Jackson Hewitt and Liberty Tax, as president. They turned the concept into a franchise in 2001.
Geeks quickly beat its sales goals, in part by attracting engineers and others left out in the cold after the 1990s tech bubble burst. At its peak in 2005, the company had sold more than 400 units and had at least 300 open. Franchisees pay an initial investment of as much as $90,000, including a $40,000 up-front fee to Geeks, to work a geographical area where a technician responds to calls.
The main benefit that franchisees receive is access to a nationwide call center. If a call comes in from a franchisee's territory, their technician responds to the call.
The company's early success had earned it accolades, including the "Best New Concept" award from Entrepreneur Magazine in early 2006. Yet the company barely broke even in 2005, and deep divisions within its executive ranks and on its board of directors over some of the company's decisions and its overall strategy opened a wide gulf.
Among the issues generating division was a proposal to tie company executives' pay to franchisee success, according to multiple former board members. Ewell left the company in mid-2005 and was followed in subsequent months by a handful of executives and managers who had been with the company from the outset. The founder, Joynes, also left the board, leaving Cole in control of Geeks.
Franchise sales appear to have slowed in the past year, and the company has lost franchises - 24 in 2007, and at least 35 in 2008. It now has 235 locations. The loss of franchises and the slowed unit sales are a primary reason why revenues have been cut nearly in half since 2005, when Geeks earned more than $9.4 million. Last year, the company made $5 million, according to financial filings.
Geeks has taken several steps in the past year to boost corporate revenue, but many of those efforts have run afoul of franchisees who say they've come at the expense of their own profits.
One such step was described as a name change from Geeks on Call to 1-800 905-GEEK - a strategy that was designed, at least in part, to avoid confusion with Best Buy's tech support service Geek Squad. In their lawsuit, franchisees claim that the name change came without any transition, generated confusion among customers and resulted in lost business.
The company also started an online and call-in tech support service known as "Call the Geek." Blasz said the service often intercepts consumers looking for on-site tech support before they can be referred to a franchisee.
Another issue is a deal announced last summer with Sam's Club. Geeks, and at least some analysts, believe a key to the company's future is through deals with national companies to give franchisees and the company access to more customers. Yet franchisees contend that the Sam's Club deal cost them money.
Under the Sam's Club terms, club members get 10-percent discounts on Geeks services. In addition, Sam's itself gets a 10-percent cut. That 20 percent comes on top of franchise royalties of 11 to 14 percent and an ad fund that now totals $155 a week. "Most (franchisees) are already paying 20 to 25 percent to corporate," said Alex Burns, president of United We Geek, the Geeks' franchise association that started in the wake of the Sam's Club deal.
Perhaps the most significant problem franchise owners have with the system deals with ad fund revenues. For years, local owners paid as much as $275 a week into an ad fund. Yet franchise owners say the ads have declined in recent years and, this fall, stopped altogether.
In September, the company told franchisees it planned to "reboot" its ad fund. Payments were cut to $155 a week, yet the funds were used only to repay old advertising debts and to pay for an ad in the Yellow Pages. Television and radio ads were stopped. "That weakens the value proposition," Burns said. "What are we getting, exactly?"
The company now appears to be focusing on opening corporate units. It has opened company-owned territories in Phoenix and Kansas City and has taken over a franchise in Portland, Oregon. The company has also proposed to take over other franchise operations, like the one belonging to Phelps.
Meanwhile, the company last year withdrew its application to renew its franchise registration in Virginia - so Virginia-based franchisees cannot sell their locations to new owners, Blasz said.
Franchisees who filed lawsuits say that, while they've requested an award from the judge, their ultimate goal is simpler. "I don't expect to get anything out of" the lawsuit, Burns said. "I want them to allow me to become an independent IT company. Then I can figure out how to survive on my own."
