Legal troubles at Jack’s Donuts concern some local franchisees

When New Castle-based Jack’s Donuts opened a centralized production facility in late 2023, Greenwood franchisee Ralph Allen saw it as a solution to a long-standing problem.

Since opening his doughnut shop in 2017, Allen had struggled with staffing—sometimes losing employees who quit midshift.

“The biggest problem has always been [finding and keeping] kitchen help,” Allen said.

So when Jack’s Donuts owner and CEO Jack “Lee” Marcum III decided to build a doughnut production facility, or commissary, in New Castle that could make and deliver doughnuts to franchisees’ stores, Allen was in. Starting in November 2023, he scaled back his in-store production. The Greenwood store still made its cake doughnuts in-house, but Allen began purchasing yeast doughnuts from the commissary.

The commissary was also to include a freezer line where Jack’s could make frozen products. Those frozen doughnuts were to be sold to grocery chains whose bakery employees would finish making the treats in-store, Allen said.

“The concept was a good concept,” he said.

But it didn’t work out.

Since last fall, four creditors have sued Jack’s Donuts of Indiana Commissary LLC for money they say they’re owed. Of those four cases, two have resulted in judgments against Jack’s totaling just over $888,000.

The two other cases are pending, including a foreclosure suit brought by Evansville-based Old National Bank in February that involves a $2.9 million business loan.

In May, the Indiana Secretary of State’s Office issued a cease-and-desist order against Jack’s Donuts of Indiana Commissary, Marcum himself and two of Marcum’s other business entities, Marcum Industries LLC and KCL Group Inc.

The order prohibits Marcum and those three business entities from offering or selling unregistered securities. The order does not prohibit the respondents from selling new franchises—rather, it relates to soliciting and selling unregistered investments in the business. The order alleges that the respondents offered an unregistered security to an investor in June 2024 and that they offered and sold an unregistered security to a different investor three months later in September.

Marcum declined to comment and asked IBJ to refrain from writing a story.

“We are actively addressing internal matters, and any reporting would likely create unnecessary concern among our franchisees, employees and investors,” Marcum said via email.

Jeff Hester of Indianapolis law firm Hester Baker Krebs LLC, who is representing Marcum in the Old National foreclosure suit, also declined to comment.

But Allen, and several other franchisees, were willing to talk—though some also expressed reluctance to further publicize Jack’s corporate woes.

“I hope this story is going to help us, not hurt us,” said franchisee Chris Karnavas, who opened his downtown Indianapolis shop in 2015. “Anytime there is bad publicity to a name, it’s never good.”

Karnavas is among several franchisees who said they think Marcum got in over his head when he decided to open the commissary.

“He took on a bigger project than what he thought it was going to be,” Karnavas said.

Karnavas, like Allen, said he signed on to the commissary because he, like many franchisees, had struggled with staffing problems.

Under the commissary setup, he said, franchisees placed their orders in advance and got late-night deliveries for the next day’s sales. If the orders were not satisfactory—poor quality, incorrect quantities or other concerns—franchisees had a day or so to notify the commissary and request a credit for that shipment, Karnavas told IBJ.

Karnavas said he started using the commissary right after the facility opened in late 2023. Early on, he had some problems with the commissary doughnuts, but after the first few months, those problems were resolved.

“I had very little issue with the commissary,” he said.

Some franchisees, Karnavas alleged, complained after the fact that they were dissatisfied with their commissary shipments and refused to pay Jack’s Donuts for those shipments. Karnavas declined to specify how he knew this, nor would he name those franchisees.

About six months ago, Marcum convened two meetings with franchisees in an effort to work out the commissary complaints, Karnavas said, but the meetings devolved into gripe sessions and nothing was resolved.

Shortly after those meetings, Karnavas decided to quit using the commissary and bring his doughnut-making back in-house. He said he believes a handful of stores are still using the commissary.

Franchisee impacts

Karnavas said the corporate turmoil hasn’t hurt his sales at all. (He acknowledged that his downtown location makes him unique among Jack’s franchisees. A significant percentage of his customers are conventioneers or other out-of-town visitors—a different customer mix than Jack’s suburban and small-town locations serve.)

In contrast: Allen, the Greenwood franchisee, said his sales suffered when he began selling products from the commissary.

“We got doughnuts that were subpar. I would use another word, but I don’t think you want to quote the word that I’ve used,” Allen told IBJ.

“The quality changed,” he said. “They weren’t properly iced. There were just a lot of problems with them, and they didn’t taste the same.”

The quality of the commissary-made doughnuts did improve over time, Allen said, but it didn’t improve sales at his shop.

Making things worse for Allen: Just as he switched to the commissary, competitor Pana Donuts opened a location less than a mile north.

Allen resumed making all his doughnuts at his shop in February and has been working to get the word out to customers, but he said sales have not improved. “I probably lost about 25% of my sales, and it’s not come back.”

In February and March, Allen’s shop was among several Jack’s Donuts locations to post on Facebook that they had brought their doughnut-making back in-house.

Franchisees who spoke with IBJ said Jack’s Donuts didn’t require them to use the commissary—and not every store did.

Franchisee Paul Ganote, who, along with his wife, owns six local Jack’s Donuts stores, said his locations never opted in to the commissary. He only would have considered it, he said, if the commissary products were of better quality and cheaper.

After doing the math, Ganote said, he realized the commissary doughnuts would cost him more—so he decided to keep production in-house.

In retrospect, it was a wise decision.

“We would have gone bankrupt if we would have switched,” Ganote said.

Ganote’s Plainfield, Southport, Brownsburg and Franklin stores make their own doughnuts. Those locations also produce the doughnuts sold in Ganote’s South Bend store, as well as his Heartland Crossing location, which is in the far southeastern corner of Hendricks County, just off of State Road 67.

Nevertheless, Ganote said, the troubles at the corporate level have still affected his shop. Sometimes customers ask him if his stores are in financial trouble.

Ganote said his sales are down right now, but the entire baking industry is in a slump—so it’s hard to know how much of his slowdown is caused by Jack’s corporate problems.

“It’s been very trying. It’s been very rough,” he said.

Looking ahead

It remains to be seen how the Jack’s Donuts corporate problems will be resolved, and it’s also unclear how or whether they will ultimately affect franchisees.

“In many cases, franchisees are the first people to suffer when the franchisor has any sort of distress going on,” said Steven Sibley, a clinical associate professor of finance at Indiana University’s Kelley School of Business in Bloomington.

But the specifics of the franchise agreement can also make a difference, Sibley said. If a franchisee has the freedom to purchase food and supplies from the vendor of their choice, for instance, that franchisee will be in a better position than a franchisee who is contractually obligated to purchase from the franchisor.

Sibley cited the example of Bennigan’s, the Irish-pub-themed restaurant chain that once had hundreds of locations around the United States. When the chain filed for Chapter 7 bankruptcy protection in 2008, 150 company-owned locations closed—but another 138 franchised locations continued operating.

(The number of franchised locations dwindled over time. In 2015, Legendary Restaurant Brands LLC acquired Bennigan’s to revive the brand. Today, there are six Bennigan’s and 27 fast-casual concepts called Bennigan’s On the Fly in the United States and 15 in other countries.)

In the case of Jack’s Donuts, it appears different stores have different franchise arrangements.

“Every store has different agreements,” said Ganote, the six-store Jack’s Donuts franchisee.

As one example of this, Ganote said some of his stores pay royalties—a percentage of sales—to Jack’s Donuts, but others don’t.

Some Jack’s Donuts stores have taken steps to distance themselves from the corporation.

The franchisee who owns stores in Fishers and Gas City, Angi O’Connell Bone, recently rebranded her shops and now operates them under the name of Boomtown Donuts.

Bone did not respond to email and text messages from IBJ. But on May 1, the Fishers store announced its rebranding on Facebook. A June 3 Facebook post showed a picture of the Fishers store with its new black, pink and blue Boomtown Donuts sign hanging above the entrance.

Karnavas, however, is bullish that Jack’s, and its commissary, will survive the turmoil. “It’s a beautiful facility, and it’s going to make it. There’s no doubt about it.”•