Three franchisees of I Heart Mac and Cheese have filed a lawsuit against their franchisor and the company's principals, claiming that they used false promises and illegal sales practices to convince them to buy into the franchise.
The lawsuit, filed in a Florida state court, argues that I Heart Mac and Cheese, or IHMC, lured them into the brand by promising low startup and operational costs as well as support from the company. Yet the business model lost money, many corporate stores were evicted or closed and that support never came.
"Defendants intentionally minimized and misrepresented the actual risks and operational challenges of operating an IHMC franchise and targeted passive investors who would typically avoid restaurant franchise investments due to operational complexities," the lawsuit said.
A representative for the company did not respond to a request for comment.
The Florida-based I Heart Mac and Cheese grew rapidly by selling franchises for its fast-casual business model featuring a menu of upgraded mac and cheese.
But franchisees have had problems almost from the get-go as many stores were never able to open and some of those that did shut their doors. The company has since lost its ability to sell franchises in Indiana over violations of federal franchise disclosure rules. That state has also filed an administrative complaint against IHMC, and California has also cited the chain for franchise violations.
A group of franchisees earlier this year also pushed back against the company, complaining about issues related to product quality as well as their own profitability.
The Florida lawsuit argued that IHMC marketed the franchise's low barrier to entry, low startup and buildout costs and low franchise fees. The lawsuit also said that that the business model costs little to operate and that owners are not needed to have business experience or even be present at the restaurant.
"The franchisor's proposition was illusory," the lawsuit said. "Plaintiffs invested substantial initial capital and continued to pay ongoing royalties for what has proven to be a fundamentally flawed and unprofitable business model."
The lawsuit noted that IHMC violated federal disclosure rules by failing to include key business experience of its officers as well as litigation against CEO Stephen Giordanella. The lawsuit said that the company "deliberately omitted" evictions of several corporate locations, including its flagship restaurant in Fort Lauderdale.
The lawsuit also said that the company failed to disclose "widespread corporate store closures" in Florida, Georgia and New York.
Franchisees also said the company made verbal financial representations to the operators that were not disclosed in franchise documents. The lawsuit accused IHMC of telling franchisees that one location generated $1,800 in daily lunch sales and that a corporate store in Florida generated $700,000 in annual revenue.
Franchisees relied on some of these representations as they decided to invest in the brand. In one instance, the lawsuit said, the franchisees were directed to speak with Carolos Gonzalez about the brand, without disclosing that Gonzalez was its director of operations. Gonzalez is one of the principals named in the lawsuit.
The franchisees also accuse the brand of misrepresenting the cost of operating the brand. Operators in one instance were told that their prime costs would not exceed 55% of revenue, which turned out not to be true. They also said that some of their costs fluctuated dramatically, notably the price of cheese. A five-gallon bucket of cheese sauce cost anywhere from $184 to $300, an increase of up to 140%.
Operators also said that the chain's pricing structure, with bowls of mac and cheese ranging from $9.99 for Classic Mac to $23.99 for Lobster Mac "proved to be untenable" as consumers complained about high prices, which reduced business.
The lawsuit accused the company of requiring they purchase from designated suppliers, which pay rebates to the franchisor and charge higher prices to the franchisees, which hurt profitability, a common problem in the franchise business. The complaint also accused IHMC of directing marketing fund contributions, which amount to 3% of franchisees' revenue, to fund franchise sales practices.