Part 2: Cuppy's Franchisees Talk about Funding Problems
MUSCLE SHOALS, Ala. - Three Georgian franchise owners of the now defunct Cuppy's Coffee chain sit down in an exclusive interview to discuss how some $350,000 has been taken from them collectively with no store build-out or equipment to show for it.
Editor's note: Blue MauMau has had many articles chronicling Cuppy's Coffee since its Java Jo’z founder Roy Snowden went to prison for tax fraud. It is rare to have a Harvard business case on a small company. It is even rarer to have a small start-up franchise chain followed by the media so closely from beginning to end. But Cuppy's has been a small chain with big stories that touch on huge issues in franchising. This journal has endeavored to pursue the many questions of a new franchise system by following this one troubled franchise chain.
This is part two of a two-part series.
The Franchisees and Franchisor:
Alicia & Rickey Benefield – Alicia and Rickey bought a new Cuppy's coffee shop to build and equip in Carrollton, Georgia. The only problem was that after they gave the company $170,000, they say that Cuppy's and its affiliated firms did not build out or equip the shop. As the Cuppy's franchise chain disappeared, the Benefields dug down even deeper in their pockets to build out and equip their coffee shop themselves. They now run it as an independent shop, Benefield Coffee Company.
Elinor (Pinky) Legaspi – Pinky paid $180,000 for her Cuppy's coffee shop in Tyrone, Georgia. She says she did not receive build-out or equipment for the money from her loan. But in spite of crushing troubles with the collapsing franchise chain, she managed to dig deeper for money and build out her own coffee shop, Grand Coffee. Pinky works an office job from 8 a.m. to 5 p.m. Mondays to Fridays to help pay off her SBA-backed loans. After her day job, she toils at her coffee shop, joining her employees at 5:30 p.m. She then works full shifts on Saturdays and Sundays (7a.m. to 7 p.m.).
Companies: One of Cuppy's affiliates, Elite Manufacturing, collected money to build out and equip the stores through its vendors. Elite accepted franchise fees on behalf of Cuppy's, informing would-be franchisees that they would either use the funds or forward it to Cuppy's. Funding Solutions acted as a lending broker to franchisees, processing SBA-backed loan applications to receive bank loans. Funding Solutions is a loan broker who matches a Cuppy's franchisee with a lender who is willing to provide a loan to the would-be franchise owners.
BMM: Each of you declare to have been mislead by various business entities in investing your money in a Cuppy's franchise. However, I don't quite understand the money paper trail. Who is your lender? That is to say, who do you pay monthly for building out and equipping your coffee franchise unit?
Alicia: The bank makes out checks, sends them to me and I send them to Elite manufacturing.
BMM: OK. A bank is lending you money. Why do you think you were mislead?
Alicia: As soon as we closed out on the SBA loan, it was like they [Cuppy's] jumped out on us. Cuppy's called us like 50 million times a day but as soon as they got their money, they were gone. We couldn't get anyone to take our calls.
Rickey: Initially they said they had a group of men that were coming in. I found out that a couple of guys [typically] would come in [to a site] and hire the builders locally. They would purchase the permits and they took care of everything. But I ended up doing everything, the complete build-out. They did nothing for my site.
When I finished, that's when we started hearing rumors [of FranSynergy and Dale Nabors taking over Cuppy's Coffee]. By then I'd already sent the two checks in. We waited and Amy Hiller [of Cuppy's] kept promising, "It's on the way. It's coming next week. Call me back and I'll give you the tracking number."
I'd call back and couldn't get hold of her anymore.
I wanted to back out of it right then but I had invested so much, right at $90,000 for the build-out. And I'm just sitting there with a box. "What do I do?" That's when I called the bank.
The bank wasn't aware of what was going on. The bank thought that they had [already] come and done the build-out. I had to explain to the bank that nobody from Elite or Cuppy's had been to my place [to do a build out].
Blue MauMau has interviewed a well-known leader and lending broker in the franchise industry. He has asked that his remarks be published anonymously. Although he says that SBA lenders are a small band that hobnob together, he isn’t worried about snitching. Rather, he thinks his honesty on loan practices may spark franchise buyers to contact him. Unfortunately, he is not able to accommodate them.
“I haven't been able to get money since December because the resale market for loans just hasn't picked up,” he states.
But nonetheless he freely shares his observations on what are red flags about the funding of the three Cuppy's Coffee franchisees.
“The lenders that I work with would never work that way. Ever. Any of the lenders that I've worked with, where there is equipment for restaurants that I've financed, those lenders where we've done SBA loans for them, will only release funds up front based on actual invoices for delivered goods.”
Beware the lender who gives money when there isn't anything to show for it. The lender will not do anything without hard copies of invoices. And the lenders that I work with either will do it and deduct it from my finder's fee or they would have me do it and I would be directly out of pocket for it. I would hire a third party to go physically into the space, take pictures, document, do tracings of the model numbers and serial numbers on any equipment before they [the lender] would release the money. And they were sticklers about it. If a lender would release money to somebody without having that information, that is not on the up and up. I just don't know how any lender in good faith could do that.
Beware the crooked franchisors who perform bait and switch with equipment. One of the ways that fraudulent activities happen is that there is a bait and switch with equipment that is not in its final resting place. That is the biggest red flag to look for. If someone is trying to get us to cut that money loose up front, and the equipment is not in its final resting place, that's a major red flag.
The equipment has to be installed in the facility for the bank to pay for it. I even did deals where there was inventory coming from out of state for a store that had a hundred different invoices for inventory. It was a retail franchise. And the lender would not pay it until there was a truck physically unloaded and an inventory taken on everything that was sent. The lender would not release one dollar. They required each and every page, a hundred pages of invoices. There had to be a date of receipt stamped and the franchisee signatures or they would not release what is called pre-funding. Prior to the doors opening, the inventory would enter the store. And they wouldn't pay for it until it was there. Documented. And until the franchisee signed each and every page that documents each and every piece of equipment. Anybody who is doing anything other than that, I would have to question.
Beware the lending broker who wants large sums up front. Normally, if a lending broker is getting large sums up front from a franchisee, that's a red flag. To ask for $5,000 upfront is something I have never heard of from a reputable business loan broker when dealing with loans of this nature. I have not taken money other than paper processing, $200. That money was spent for checking credit. But if anyone is asking for any sort of material money up front other than what it costs physically out of pocket to do paperwork, that is a huge red flag. There are a huge number of states that have laws in which you cannot even ask for anything up front.
Beware the new franchise system that gets easy financing for its franchisees — something is fishy. The lending community is pretty close-knit overall. Quality lenders go to shows. They meet with each other. They hobnob. They swap employees back and forth. It's a closed industry and they know who is a good bet and who isn't. So if you have a franchise system that is new or has been troubled, and they all of a sudden are getting financing, the paperwork is just clicking like clockwork, you'll probably need to lift up a shoe to see what you might have stepped in. Because that is not how reputable lenders do the deal. My lenders would have never touched Cuppy's, just because of what I knew of their prior background.
As a lending broker, I sign contracts with lenders. If the deal goes south and we find that there were any shenanigans where you did not meet the letter of our requirements, you have to buy the loan. That means that I would have had to buy the loan from the bank. I wouldn't have touched the Cuppy's loans.
BMM: Who helped you get the loan and gave you support?
Alicia: We all went through Funding Solutions, LLC [a Michigan-based loan broker who specializes in SBA loans for franchisees]. They charged us $5,000 for their services. When we sat with Dale [earlier in the morning], he told us not to pay them [Funding Solutions]. And I should have thought to tell Dale, we should not have paid you.
Rickey: We received no support whatsoever. I had the kitchen built out. The stove. I had to take pictures of everything I'd done and send in the invoices. If they didn't approve me for the rest of the remainder, the balance, I couldn't have opened up. But they kind of felt sorry for me since I'd already got this far with it. This is what it was going to take to get to the rest of my supplies. What I was going to use was my working capital to pay off some debt that I'd already accumulated for this build-out. So, they released the money to me and I finished out the store in the café. It's been from one month to the next because I have nothing to fall back on. We've got some great [understanding] landlords. If it weren't for them it would be over by now.
BMM: Did Funding Solutions make any promises to you as your lending broker?
Rickey: Well, Jacqui Jeffries, who worked for Cuppy's as a salesperson and had her own dual drive-thru in Arizona at the time, said that I had been approved [for a loan backed by the Small Business Administration]. Funding Solutions put together a business plan [for our Cuppy's Coffee shop] so that the banks would approve us. Anyhow, once Funding Solutions got through, they had two banks that approved us.
But no. Funding Solutions did not guarantee anything. But Cuppy's did. Jacqui Jeffries guaranteed that I would get my loan. Funding Solutions never did. Funding Solutions sent us a couple of bills [for their services] but I never responded. Because I never signed anything with Funding Solutions. It was all through Cuppy's.
Pinky: But Funding Solutions got smart. You guys [Rickey and Alicia] started in early 2007. Because when I had to deal with Funding Solutions in late 2007, they already had [a requirement to pay them] upfront before someone could start doing business with them. They told me, "We put the paperwork together. You have to pay us $5,000 for that."
Rickey: Oh, so you had to pay? See there was nothing like that for us. I thought that was just part of one big package. That they were there to help us get approved, to get a loan.
BMM: That's interesting that Funding Solutions would change their policy of not charging money upfront to the Benefields but then later charge Ms. Legaspi $5,000 up front for the loan. That's a big chunk of change. Anyhow, did the fact that the funding came easily and quickly in one big package send a message that your banker was confident of the franchise system and your purchase?
Pinky: Since I was getting a loan from the bank, I thought if the bank thought it was okay to send money, that Cuppy's must be okay [as a credible franchisor]. The bank funded the entire amount requested.
Rickey: Right. The banks and Cuppy's were working together on this since they knew that Cuppy's had a good thing going. They approved it based on Cuppy's information too.
Pinky: The SBA [Small Business Administration] should hold the banks accountable for lending to Cuppy's.
BMM: Why do you say the bank should be held accountable?
Pinky: My bank wired the build-out and equipment funds to Elite's bank account. It's sent to the same account for everyone who wired their money. It was authorized by me. Elite Manufacturing submitted an invoice to the bank for the build-out and equipment. And then the bank would ask me if I approved of the invoice, and of course I did. So the funds were wired directly from the lending bank to Elite's Bank of America account.
I pay SBA loans monthly to the bank by check. Everything the bank dispersed must be paid for. Funding Solutions put together my business plan. I saw the business plan after all this fraud thing came out. I wrote a letter to Funding Solutions telling them there is fraud going on, send me all the documents you have with my account on it. So they sent me a box full of documents and part of it was the business plan.
Let's say I closed my SBA loan on a Friday. It was all in a rush and there wasn't a bank representative in Atlanta that could be on site with me. They flew someone in from New Jersey. They came here on a Friday. They looked at my shop, which was a white box. They asked me to sign all of my SBA documents, which I did.
And then come Monday, “Where is Elite's invoice?"
"You have to get it from Elite.”
And then Theresa St. Claire signed a spreadsheet that declared $100,000 for the build-out and $130,000 for equipment. The bank wired $130,000 for the full equipment. The bank representative on Friday saw it was a white box with no equipment there. So I thought it was normal practice — that Elite would send them a generic invoice and the bank would wire them the money. I learned later that they should get all of the information, like the serial numbers of the equipment, which was never supplied to the bank.
BMM: So you feel that the bank was negligent in sending out funding for services and products that weren't provided. Can you take me through the significant parts of your purchase and loan process to help me better understand that?
Pinky: In January of 2008 I signed a lease. At that point I already had approval for the SBA-backed loan from the bank. The lease agreement only gave me three months free rent. That means that in April I would start paying full rent. Cuppy's said that they could get the build-out done in three months. “It's not a problem.”
Come April, I was already paying rent for my store. I wasn't really worried at that time because I had six months worth of capital from my SBA loan. So one or two months late is fine with me. My SBA loan was for $300,000. April was when Dale [Nabors] took over. He said he had lots of plans for Cuppy's. Dale brought in a new guy when the SBT lawsuit hit, Gregg Rynearson, in probably late June. I spent another $50,000 to make my retail space a certified Cuppy's white box. Come June, I said to Cuppy's, “I'm ready,” and asked, “Hey, where's your guy?”
They [Cuppy's] said, "We aren't going to send anyone until you pay us the rest of the money."
That's when I pushed the bank that Cuppy's needed to be paid by issuing them money from the loan. My bank was like, “No problem.”
The remainder of my purchase order to Cuppy's was $100,000 for build-out and $130,000 for equipment. The bank issued money for the equipment. The bank only had an invoice from Cuppy's, not having seen the equipment or written the serial numbers down. The bank said that they could not issue build-out [funds] because it wasn't built yet, but they said they could issue the money for the equipment.
I came to realize later that this was a big mistake by the bank.
BMM: It sounds like your bank, a major bank, had an awful lot of faith in Cuppy's Coffee, to not verify if anything was actually being done for your and ultimately their money.
Pinky: Right. When I signed the SBA loan, there had to be a representative from the bank in person. So the bank flew a representative to be there at the site. She saw my site was a white box. There was no equipment in there. I didn't know better so I signed all the paperwork. The following day the bank wired all the money, $130,000 to Elite [Manufacturing]. That was July. I got nothing for it.
A week after the money was dispersed I got nervous. It was $130,000 but I thought to myself, "What is Cuppy's doing?" I could not get a hold of anyone. No one was answering the phones anymore. If they did answer, they would say someone is going to call you back. [But they didn't.]
So I finally called the bank and contacted the same representative who went to our site. She was the one doing our loan, doing business with Funding Solutions. And she spoke directly with Cuppy's finance guy, Steve Wesolowski. I called her and said that it's a week now and I haven't heard from Cuppy's or Elite, could you get the money back that you wired? She said no she couldn't do that. I asked her, “Well, what do I do?”
Much later, I received a call from Greg Rynearson, Elite Manufacturing's president who replaced Brian Hayes. He said to me, “Okay, you are one of the lucky ones. We just signed a deal with Eden Construction and we are sending people out to finish your build-out."
They actually sent someone from Eden who came to the site.
The Eden guy was there for a week. He was looking for local contractors. After a week he was pulled out by Eden because Cuppy's wasn't paying its fees to Eden.
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Related Reading:
- Part 1 of the 2 part series: Franchisees Learn from Cuppy's Broken Coffee Chain
- Funding Solutions, LLC Responds to Franchisee Accusations
- Class Action Lawsuit against Quiznos Turned Down
- Franchise topic:
