A year ago, H. R. Kaufman, founder and owner of Pioneer Take-Out, turned to his friend and business associate Terrence P. Goggin for help with his troubled fried chicken chain.
Faced with declining sales and discontented franchisees, Kaufman hired Goggin, an attorney and former California assemblyman from San Bernardino, to help find a buyer for the chain he started with one outlet in Echo Park 27 years ago.
As it turned out, Goggin and a group of investors agreed to buy the Los Angeles company last month. But today the deal is in shambles as Kaufman and Goggin battle for control of the embattled company. And last week Pioneer filed for protection from creditors under Chapter 11 of federal bankruptcy laws.
Caught in the middle are the company's 220 franchise owners, many of them immigrant entrepreneurs, some of whom paid a minimum of $250,000 to become part of the chain. "They are scared to death," says Marilyn Lu Gordon, who owns a Pioneer outlet in Highland Park. "They don't know how it is going to affect them. They are concerned about the future of the company and if it is going to stay in business."
Long disgruntled, the franchisees had high hopes for the sale of Pioneer when it was announced in early December.
At the time, it seemed like a good deal for all involved: Kaufman would receive $5 million over a period of time, plus interest. The Goggin group expected to earn a hefty profit by taking the 270-store chain public in a few years. And many franchisees relished the prospect of new management and promises of increased advertising budgets.
But the plan to rebuild Pioneer quickly fell apart.
A disagreement about rent money for Pioneer outlets quickly escalated. Goggin withheld certain payments to Kaufman. In return, Kaufman locked Goggin out of the company's Mid-Wilshire headquarters and declared himself back in control at Pioneer. Goggin disputes Kaufman's contentions, and both sides have appealed to the franchisees for support.
Kaufman is telling Pioneer franchisees that he is the rightful owner. So is Goggin.
Some franchisees say they are ignoring both Goggin and Kaufman. They are paying rents directly to landlords and withholding royalty payments. They continue to pay suppliers directly for their food and other supplies.
"I don't consider either of them as the rightful owner because they haven't got the judge's ruling," says Howard Liu, who operates a Pioneer outlet in Torrance.
"We cannot leave because, No. 1, if we leave the store, we lose too much. And No. 2., there is no way we can promote this business on our own. So we are stuck," Liu said. "We can't go forward. We're depending on the legal system to give us fair treatment."
Pioneer recently has suffered from intense competition in the fast food industry. While the chain focused its expansion on the regional market, national competitors like Kentucky Fried Chicken and Church's expanded, adding new products along the way and using their large number of outlets to embark on costly advertising programs to draw in customers.
Pioneer also cut back on advertising, which is considered crucial in the fast-food business, even though franchisees continued to pay into an ad fund. The lack of advertising hurt sales which were already on the decline. In addition, Pioneer seemed to fall behind in introducing new menu items, like low-fat broiled chicken to appeal to health conscious consumers. Meanwhile, McDonald's introduced its highly successful Chicken McNuggets as Pioneer was getting battered from old rivals like Kentucky Fried Chicken and new ones like El Pollo Loco.
Meanwhile, Kaufman was pursuing other investments as well. The chicken chain's early success gave him the riches to pursue other investments, and real estate was a favorite. He became more involved with the multimillion-dollar real estate development of Blue Jay near Lake Arrowhead; the troubled Arrowhead Pacific Savings Bank, and other investments, according to a group of franchisees.
Company in Turmoil
"The management got more involved in real estate ventures than restaurant operations," said Janet Lowder, manager of the restaurant consulting group at Laventhol & Horwath in Los Angeles.
The franchisees sued Pioneer and Kaufman last year, alleging that he issued fraudulent information to sell them franchises and inappropriately used money from Pioneer to finance his other investments. The lawsuit is still pending, and Kaufman has denied the charges.
It was the increasing discontent among franchisees, many of whom withheld royalty payments, that led Kaufman to put cash-strapped Pioneer up for sale. Goggin was one of three prospective buyers, according to company insiders.