The Arizona Republic (2024)

Gubernatorial hopeful Doug Ducey portrays himself as an "American success story" on the campaign trail, drawing ties between his leadership at Cold Stone Creamery and his ability to manage the business of the state.

He touts the company's growth under his leadership, from a single Tempe store to a corporation with franchises across the nation, before Ducey and his partner sold it seven years ago. It's a sales pitch that resonates with voters, and has helped put him at the front of the Republican primary pack running for Arizona governor.

But for weeks, Ducey's chief rivals in the race, Christine Jones and Scott Smith, have questioned whether his tenure as CEO was the triumph he portrays. In particular, they have raised questions about the 2007 sale of Cold Stone to Kahala Group and speculate that he has been absent from recent public forums to avoid answering questions about it. Ducey's advisers says he is sticking to a prearranged campaign plan.

Ducey and his partner, Cold Stone Creamery founder Don Sutherland, became locked in a dispute with Kahala over the company's value post-sale.

While terms of the sale and the particulars of the dispute are sealed behind mutual confidentiality agreements, a person close to Ducey and Kahala recently confirmed to The Arizona Republic and 12 News that after the 2007 sale,the parties entered arbitration to resolve the dispute. The intermediary was not involved in the arbitration but is aware of key details because of his relationship with the parties. Arbitration is commonly used to efficiently resolve business disagreements. The companies, through this intermediary, waived their confidentiality on two financial details of the transaction at the request of The Republic and 12 News.

Cold Stone's original sales price was about $80 million. Ducey and his partner received "multiple payments over time," the intermediary wrote in an e-mail. During the arbitration process, the parties agreed to reduce the original $80 million price by an amount that was less than $16 million.

"The parties to the transaction eventually reached a compromise which involved Kahala making a reduced final payment," the intermediary wrote in an e-mail. "The parties to the transaction have mutually agreed to waive confidentiality and have confirmed the reduction was less than 20% of the original purchase price."

Ducey has downplayed the dispute involving the company's sale. In an Aug. 12 statement to The Republic and 12 News, Ducey said, "It was a successful sale because we worked together and agreed on the outcome. Both sides signed off on the final terms and both were satisfied with them; indeed, the parties to the transaction continue to be satisfied with the terms of the deal."

Jones, a former GoDaddy executive, and Smith, a former Mesa mayor, have called on Ducey to release details of the settlement and his deposition in the case. Jones and Smith say disclosure of documents related to the sale and arbitration would help voters judge for themselves whether Ducey's leadership of the company was successful.

Ducey has declined, citing the confidentiality agreements.

Mark W. Rutherford, an Indiana attorney who represents entrepreneurs, said sales prices are sometimes challenged after the fact.

"Those disputes do happen, and they're often mediated," he said.

"There's often disputes about whether one side was careful enough when they bought (the company) and thought it was in better shape when it was sold."

Financial statements show that in the years before the sale, Cold Stone's profits were falling even as it was opening stores at a rapid pace.

Documents filed with the California Department of Corporations show Cold Stone's revenue from selling and servicing franchises nationwide more than tripled from 2003 to 2006, to $62 million, while profits plunged 89 percent, to $253,369.

The average annual sales at Cold Stone stores dipped for three straight years, from $391,700 in 2004, to $354,700 in 2007. As stores were quickly opening, others were closing: in 2004, for every 100 stores that opened, three closed. By 2006, the year before the sale, 28 stores closed for every 100 that opened.

Ducey has blamed the recession,which economists say started in earnest in 2008, for the store closures and the sales dispute.

In his Aug. 12 written statement, he said "many companies that are in growth phases wind up investing much of their profits right back into the business. That's how they grow."

"And often times when companies are acquired they are valued for the strength of their brand and their future growth potential," he said. "That was certainly the case with Cold Stone."

John Gordon, a restaurant-industry analyst and franchise expert from San Diego, reviewed the company's financial disclosures.

"They were declining as early as 2004, which is quite ominous," he said. "While the company was able to establish some early growth, it didn't appear the growth was to be sustained."

The intermediary close to Ducey and Kahala wrote in an e-mail that "fast growing companies are often not 'profitable' " because they sometimes use profits to fund growth.

"Indeed, many fast growing companies cannot fund that growth through cash flow and continue to make (or take) investments believing that they are building value and the profits will come," the individual wrote in an e-mail. "In Doug's case, the continued investment DID create growth and significant value. Presumably Kahala, a sophisticated buyer which has purchased several companies both before and after Cold Stone, had this PUBLIC information and understood that growing a company and creating value requires investment. With this information they agreed to buy Cold Stone for approximately $80,000,000."

Sutherland, Ducey's partner, told The Arizona Republic on July 29 that he would not share details of the arbitration proceedings, saying there's "no more disagreement between anything with either party."

"We just worked it out and we agreed to the terms that we agreed to," Sutherland said. "Those are private. I don't discuss that with friends. I don't discuss it with, really, anyone. It was a private transaction and everything was resolved and it was all done."

Secretary of State Ken Bennett, who is running for governor in the Republican primary, waded into the matter Wednesday, saying voters are entitled to full disclosure.

"The most important thing for an elected official is ethics," Bennett said. "And I think voters are entitled to know everything they can possibly know about a candidate before an election occurs instead of after, and hopefully all of that will come out sooner than later."

Jones said the new details reported by The Republic and 12 News represent a "significant misrepresentation" by Ducey of Cold Stone's success.

"If you're saying you're such a great business man, grew such a great company, and you created all these jobs … and it was all a big house of cards, I think voters are entitled to know that," she said.

Smith said he's pressed for details of the dispute because Ducey "refused to acknowledged it was a significant dispute."

"That's what really got me going — not the specific deals of the transaction, but the fact that he denied that they even existed," Smith said. "I think Arizonans deserve a governor who will tell the truth and Mr. Ducey has not told the truth about this transaction — not even close."

Ducey has consistently defended his business acumen, saying he grew a small company into one of the country's most beloved ice-cream franchises. He said the sale of Cold Stone was successful because both sides worked together to resolve the issues.

"The story of Cold Stone — growing from a handful of stores into an international brand that has created thousands of jobs and served millions of customers — is more than two decades long, and yet there seems to be a fixation with one brief period my partners and I sold it," he said. "I view it as one small event in a large success story, and yet independent expenditure groups and campaign operatives for my opponents are determined to drag it through the mud."