When a business struggles financially, not only is its budget stressed, but the people who own and operate the business are often stressed as well. That’s why it’s so important that a business practice prudent financial management. While most people launch a business to satisfy a consumer need, they also do it to improve their lives and to achieve financial security. The worst-case scenario is to work hard to launch a business and invest a lot of money only to have the business deteriorate your quality of life and leave you worse off financially than you were before.
Cold Stone Creamery Susan and Donald Sutherland founded Cold Stone Creamery in 1988. The couple liked ice cream that was neither hard-packed nor soft-serve, and opened the first Cold Stone Creamery in Tempe, Arizona. The “Cold Stone” name comes from the frozen granite stone used to mix “mix-ins” like candy, Oreo cookies, nuts, or other edibles into ice cream in Cold Stone stores. In 1995, Cold Stone opened its first franchise in Tucson, Arizona, and grew quickly through the late 1990s and early to mid-2000s. At its peak it had around 1,400 franchise stores in the United States and several foreign countries. The number of stores doubled from 2003 to 2005 alone.
In June 2008, a Wall Street Journal article, by Richard Gibson, examined the unusually high number of Cold Stone Creamery franchises that had closed or been put up for sale by their owners, many of whom had suffered severe financial losses and emotional distress. The article lays out both sides of the story—including the claims made by disgruntled Cold Stone franchisees and the company’s counterclaims. While the article examines the financial plight of a number of Cold Stone franchisees, it makes a larger point. The Cold Stone Creamery story illustrates the financial and emotional hardships that beset business owners if their costs are too high relative to their revenues and/or they’re trying to sell a premium-priced product in a tough economy. It also illustrates some of the most important financial issues that business founders should be mindful of when setting up a new business.
Since 2008, the situation regarding Cold Stone Creamery and its franchises remains largely unchanged.
According to CNNMoney.com, the failure rate for Cold Stone Creamery franchises, based on SBA loan data from October 2000 through September 2009, was 31 percent, the second worst of the franchise organizations it follows. Commenting on the failure rate, CNNMoney.com said, “The product is sweet, but the financials can be bitter. In the last 10 years almost one in three SBA-backed (Cold Stone Creamery)
franchisees defaulted on their loan.” In December 2010, Cold Stone Creamery threatened a lawsuit against CNBC because in an upcoming documentary, entitled “Behind the Counter: The Untold Story of Franchising,” CNBC planned to portray Cold Stone Creamery in a very unfavorable light. The program aired as scheduled, and it’s unclear whether a lawsuit was actually filed.

Discussion Questions
1. If you were thinking about buying a franchise, like a Cold Stone Creamery store, what financial information would you look at and analyze before you completed the purchase? Be specific.
2. After reading the case, do you sympathize with the disgruntled Cold Stone franchisees, or do you believe the company’s explanations?
3. Do you think that some businesses that have financial trouble might never have had a chance to begin with? If so, what can a business owner (including a franchisor of a Cold Store Creamery) do ahead of time to make sure the business is financially feasible?
4. At some point in your career, could you see yourself buying a franchise? If so, what type of franchise do you think you’d enjoy owning?
Application Questions
1. What lessons, regardless of the type of business involved, can a prospective business owner learn by reading this case?
2. Do some Internet research to see what the status of Cold Stone Creamery and its franchisees are today.
Has the business environment for Cold Stone Creamery franchisees improved or are a number of them still going out of business? Make a list of the business and environmental factors working for and factors working against Cold Stone Creamery franchisees.