At its annual meeting in February, Nutri/System offered owners an assortment of five new "business formats" in what seemed a last-ditch attempt to achieve a truce. The new formats, the company argued, would significantly reshape the relationship between franchisor and franchisee, and would answer the franchisees' concerns. Katz reiterated the offer in a letter of March 1, writing emphatically of the need to "end the divisiveness." The proposal was rejected out of hand. Trying a new tack, the combatants decided to dispense with attorneys. Katz and Leonard Posnack, a franchisee based in Philadelphia who represented the plaintiffs, closeted themselves in an office for several weeks; their sweat and swearing yielded a tentative agreement. But these terms, too, were summarily rejected at a meeting of franchisees held in Chicago in early May.
Finally, Katz, Posnack, Heinig, and two other franchisees, Don Odle and Ed Richey, went into extended deliberation. "We met with Harold in his office, hour after hour . . . and went through it step by step," says Heinig. "At times you've got to speak your mind and be a man about it, and Harold did, but he was cooperative and very sensitive to issues." As the negotiations continued, it became clear to Katz that not only would Nutri/System lose much of its food margin -- that had become a given -- but that he would lose much of his control of the company. The franchisees wanted a direct say in decisions ranging from national advertising to food-product development.
Cooperative and sensitive he may have been, but the result of the negotiation was not quite what the franchisees might have anticipated. "That," says Katz, "is when I decided that I should probably sell the company. . . . Restrictions were being put on us, as a franchisor, that I, personally, would have had trouble living with."
Leslie Charm is an affable, over-weight fellow with an MBA from Harvard and few pretensions. He had been in banking and insurance before he and two friends formed YCK Group in 1972. YCK's express purpose was finding, buying, and restoring troubled companies. Docktor Pet Centers, its longest-held operation, "was a typical franchise story," Charm recalls, as he turns a new Buccaneer over in his hands. "It had been started by an entrepreneur who was a great franchise salesman, but then didn't deliver the service. There was no product in the warehouse, no one calling on franchisees, no promotions, no nothing. The company was facing X-million in lawsuits."
YCK took over management of Docktors in 1972 -- it has since purchased the company -- and in a modest, no-nonsense way, turned the company around; it is now heralded as "the nation's largest franchised chain of department stores for pets," with 212 stores in operation and 16 on the drawing board. In all, YCK owns three franchised companies, including Katz's former embarrassment, Nutrient Cosmetics. The three businesses together total 700 stores with annual revenues, at retail, of $200 million.
When Katz began to think about selling Nutri/System, Charm's name was one that came to mind.
"Harold's attorney approached us in May of 1984," Charm explains. "He said, 'You guys understand the franchise business, you understand trouble, you've been through litigation before . . . and you understand that, when you've had litigation and settle, a new face helps. . . .Harold wants to sell, and I believe you guys are really the right buyers. Would you be interested?" Charm indicated that, given a settlement, he would be.
Katz remembers the events a bit differently, claiming that a neutral third party brought the two interests together.
In any event, Nutri/System began to provide information to Charm. In early June, Katz, Heinig, Posnack, Richey, and Odle concluded their mini-marathon. On June 11, at yet another meeting in Chicago, the plaintiffs accepted the settlement. Under the terms of the 32-page agreement, Nutri/System cut its markup on food to 33% -- a major reduction -- absorbed distribution costs; and set up food, advertising, and advisory committees, in which the franchisees had a significant say. Loudly, everyone heaved a sigh of relief. Quietly, a copy of the settlement was delivered to Charm.
The obstacle of the lawsuit removed, Charm began to make discreet inquiries of his own. "I put people on the phone to call 35 franchisees who owned some 250 centers. They said, 'I'm thinking about buying a Nutri/System franchise; tell me about it." What Charm heard was what he had anticipated. "They complained about advertising, lack of service, the worsening situation over the years." Nutri/System, Charm concluded, had a solid concept and a viable market, but "hadn't done anything in three years." In short, it was his kind of business.
On September 10, 1984, Nutri/System announced that a group of investors -- headed by Charm -- would acquire the company for about $9 a share, or $87.5 million, with the final price to be determined once the Gloria Marshall salons were disposed of, a condition Charm insisted upon. (Katz had already decided either to divest or to shut down the salons, he says; the sale simply sped up the process.) For Katz, whose former 67% share had once been worth more than $300 million, the price represented a cold confrontation with reality: His 58% share now was worth $50.8 million. But there was no arguing that the figure was reasonable. The day after the announcement, Nutri/System was a big percentage gainer on Wall Street, climbing 1 1/8 to finish at 7 5/8. The company's $40 days were a dim, distant memory.
