Khmer

Khmer is a food service franchise system that runs a deli counter. In 2003, Boran acquired the brand
name and business practices of Khmer. Khmer was the Franchisor and Boran became one of the
Franchisee from Boston, Massachusetts. Boran chose to purchase the Khmer franchise as he saw it to be
NOT FOR CIRCULATION; NOT FOR PUBLICATION

a firm-level strategy although he did not know Khmer personally.

Khmer charged him a Franchise Fee. This lump sum payment was due at the beginning of the relationship
and allowed him to take part in the franchise system. Khmer charges him a royalty on gross revenue.
This royalty consists of some percentage of the franchisee’s gross revenues or sales. Khmer charges the
franchisee an advertisement fee which is a percentage of gross revenue. This fee is intended to pay for
regional advertising which will help his franchise in Boston. Boran is contractually obligated to purchase
For class discussion only;

inputs from Khmer which Khmer actually marks up the costs from their original price.
In a 2004, Boran complaint that:
"In the big picture they (Khmer) have not given us the support they had previously….I have not
seen anybody in the corporate staff in three years. They are not spending marketing money in this
area."
Two years earlier, a franchisee in Nebraska claimed in an arbitration complaint, that Khmer had retaliated
against them for refusing to open a new, turnkey store. With turmoil building up amongst its franchisees,
Khmer which was founded in 1971, filed for Chapter 11 Bankruptcy in the summer of 2004.
To learn more about Khmer, the company was sold several times in its 35year history most notably for
under $3 Million in 1981. The lack of continuous ownership and leadership is evidence that the firm is
seen as a mechanism for cash flows only and not as a growing and organic entity. There is a lack of a
sense of community at Khmer’s as evidenced by the two disputes which began the case. Furthermore,
below is a quote by the then current President Samuel Smith after the 2004 bankruptcy filing regarding
the company’s goals:
“…make money by selling the world's best sandwich, simplify our operation, obtain the financial
resources to grow our franchise system, and make certain that our valued franchisees get the
support, training, and encouragement they are entitled to receive.”
Smith acknowledges franchisees but they are listed last on his list of priorities after making money and
obtaining financial resources. Of course, management’s task is to maximize shareholder wealth and Smith
cannot be judged for wanting to earn profits. However, the lack of genuine concern for franchisees when
the relationship between the parent and the operators had been so strained may be deemed to be a serious
strategic error.
A second major difference between the two firms is in their capital structure. Khmer
financed its business not only from operating cash flows but also from debt and public equity.

Page 1 of 2
(Brown, 2014)
 In 1995, the company was taken public and listed on the NASDAQ. In 2004, the company listed
$71 Million in liabilities in its bankruptcy filing. These additional financial pressures certainly
added to its insolvency and failure and, it is evident, that the firm could not grow through cash
reserves.
Thirdly, the compensation of the franchisor differs. Khmer franchisees have expenses
that are very typical in the franchise market.
First, they pay approximately $500,000 in capital expenditures.
NOT FOR CIRCULATION; NOT FOR PUBLICATION

Secondly, they pay a $30,000 franchise fee to Khmer’s.

Thirdly, franchisees are required to pay a total of 10% of top-line sales to the company which is made up
of a traditional royalty fee plus an advertising royalty fee.
Finally, and as evidence through disputes and litigation, there was no common bond
For class discussion only;

between those that controlled the parent company and those that operated the actual stores. After its sale
to Foodskye post-bankruptcy, the company continued to operate and franchise under the Khmer’s name.
However, as before, the company still does not portray this sense of common purpose. The following text
was retrieved from the company’s website under the “Franchising Requirements” page: Khmer’s is
seeking out highly-motivated individuals for franchise opportunities who are passionate about owning
their own business and creating lasting memories for their guests, as well as becoming an integral part of
the community in which they serve.
The Khmer’s Franchise opportunity offers exclusive multi-unit development contracts for a minimum of
three restaurants. The information detailed below briefly outlines the requirements for becoming a
Franchise Partner with Khmer’s!
It's important that Khmer Franchise Partners have:
• Restaurant management experience as an owner and/or operator*
• A minimum financial net worth of $1.5 million and liquidity of $600,000 (3 store
commitment financial requirement)
• Enthusiasm for the brand and business ownership. The focus is on the franchisee’s
experience and financial assets. While important, this is standard practice in the food-service
industry as they are required by almost all franchisors. Even after the failure of the company,
Khmer’s has no policy of forming a bond between itself and its franchisees.

Questions for deeper analysis of the case:

1. What led to the Boran’s down path to failure?
2. What are the advantages and disadvantages to franchising to both parties include?
3. What kind of relationship should a franchise system have?

Page 2 of 2
(Brown, 2014)