Franchisees Kept Out of Earnings Forecasts for Their Own Loans

Posted Wed, 2009/06/17 - 17:44 by Don Sniegowski

WASHINGTON - With a quiet wink and a nod, many franchisors and lending brokers pass around financial information to a franchise investor's bank while keeping the franchise investor in the dark. Everyone seems to know except the person who has the most at stake in the loan, the franchise buyer. And yet, lending brokers often say that they are the agents for franchise owners and not the franchisor.

One franchise lending broker, who is well known in the industry but wants to remain unnamed, declares, “One of the oldest tricks in the book in franchising is the back of the napkin deal where the franchisor says 'Okay, we cannot give you an earnings claim. But we will help you put together a business plan for you to take to the SBA.'

"Because the SBA requires a business plan. It must be documented with a three-year financial forecast.

"The franchisor frequently will supply numbers with a big disclaimer saying these are not indicative. We cannot say anything. These are purely for business plan purposes.”

Toronto-based franchise attorney Michael Webster thinks this is a problem. Webster has been involved in legal agreements south of the Canadian border for years, and Ontario franchise law is based on the U.S. Federal Trade Commission's franchise rule. He states, “While scribbling deceptive earnings claims on the backs of napkins by franchisor salespersons does still occur on occasion, the franchisor, SBA packagers and banks have evidently come up with a more sophisticated version of the earnings fraud. The SBA packager gives out an earnings projection to the bank, avoiding the item 19 requirements of reasonableness, but never shows the earnings projection to their client until the SBA loan has been approved.”

Too Little Too Late, Or Not At All

Take the example of Elinor “Pinky” Legaspi, a franchise owner. Her now-collapsed franchise chain declared in its 2007 franchise disclosure document that it refuses to give potential earnings figures to franchise buyers. Cuppy's Franchise Disclosure Document of 2007 clearly states that they will not provide earnings projections.

Item 19: “We do not furnish or authorize our salespersons to furnish any oral or written information concerning the actual or potential sales, costs, income or profits of a Cuppy's franchise. Actual results vary from unit to unit and we cannot estimate the results of any particular franchise.
"We specifically instruct our sales personnel, agents, employees, and officers that they are not permitted to make such claims or statements as to earnings, sales or profits, or prospects or chances of success, nor are they authorized to represent or estimate dollar figures as to a franchisee's operation. We will not be bound by allegations of any unauthorized representations as to earnings, sales, profits or chances of success.”

But investors reasonably desire to understand future earnings scenarios of their investment. That includes banks. So franchisors typically prepare pro forma (financial forecast) statements with exact earnings projections for the franchisee's lending agent and for their bank.

Below is a pro forma profit & loss statement that Cuppy's Coffee and Funding Solutions, the franchisee's agent, prepared it without sharing the information at the time with the franchise candidate, Ms. Legaspi.

Figure: Three-Year Profit & Loss Statement prepared by Cuppy's Coffee and Funding Solutions for a franchisee to obtain a bank loan

The financial projections compiled in June 2008 show a rosy three year picture for 2009, 2010 and 2011. Compare that to the reality of 2007 and 2008, where Cuppy's franchisees were either unable to survive as a franchise or they went independent. The coffee chain imploded.

What's going on?

And then there is the additional problem of not being able to see the financial projections until it is way too late for it to do much good for an investing decision.

Only after franchise owner Claudia Robbins had signed the franchise agreement, signed a loan agreement with her lending agent, and then asked for the business plan did she see the financial estimates that Cuppy's had prepared for her lending broker on how much her shop would make. "Those numbers clearly came from Cuppy's," she declares. But by the time her lending broker, Funding Solutions LLC, showed her the earnings figures for her shop, it was too late to pull out.

"When I saw the numbers after closing, I gagged," Robbins emphatically states.

Those numbers were shown after she "closed" or signed the franchise agreement and bank loan agreement. She was on a road from which there was no pulling out.

Lest there be any doubt who her lending agent works for, Franchise Solutions emphasizes that its relationship is with the franchisee, not the franchisor or bank. The lending agent for the franchise buyer posted an article on June 1 that specified who its client was:

“. . . the lending institution works directly with our client, the franchisee, regarding distribution of the loan proceeds.
"If we find that a franchise system is not operating within a standard that will not serve the franchisee’s best interest, we will withdraw offering our consulting services to prospective franchisees for that franchise system.”

Ms. Robbins observes that Funding Solutions was constantly visiting Cuppy's Coffee and their finance department.

“The lenders that I work with would not accept that,” states a lending broker. “If there was something that came from the franchisor, they would not accept it. The lenders that I dealt with would not do a deal unless they had pre-approved a franchisor. And they have lots of requirements. They must be in the business for at least five years. There could be no prior bankruptcies. They [the franchisor] had to have multiple years of increasing retained earnings.”

Regarding the earnings projections given on her Cuppy's franchise to the bank, Pinky Legaspi says, "Those numbers had no relation to reality."

PInky and Claudia did eventually see their earnings projections — after their loans closed. But many franchise buyers never even see the earnings projections given to their lenders. Many have no idea that such a thing exists in connection with their loans.

Bogus Cash Flows Projections

The question is why the seeming collusion between lending broker, bank, Small Business Administration and franchisor.

“You have a back-door earnings claim. Not only are financial forecasts being provided to banks to induce the loan, but lenders and loan brokers are often contractually prohibited from sharing these earnings projections with borrowers," says New York franchise attorney Paul Steinberg.

Steinberg stresses how this system is like the housing liar loans, where bogus income and assets were put into sub-prime home loan applications without a care.

"The risk is passed on so no one cares. And the franchise owner isn't in a position to know or do anything about it," says Steinberg. He adds, "The actual person who is the real party in interest is the franchisee/borrower who will lose their home if the loan is not paid. In this case, the 'real party in interest' is prohibited from knowing about these bogus numbers by the franchisors, who forbid the lenders and brokers to share them with the loan recipient."

“If the financial forecasts were accurate, a lot of these loans would never be made," declares Steinberg. "If the bank, broker or the government were on the hook for losses, you would never see these loans. It is like the housing liar loans."

A franchise owner in a 300-unit franchise system states, “My lending consultant told me that the only way the SBA will guarantee a loan is if you put a number down that fits their requirements, and that they knew what those ratios were.”

He borrowed $300,000 and finds that almost all of his fellow franchise owners are not able to make money.

His lending broker worked with him, telling him what numbers needed to be inserted in order for him to qualify. He says, "I remember that my lending consultant called to tell me that they had to change some of my expenses in order for me to qualify for an SBA-loan with a lender."

"When I was preparing for the loan, my loan consultant, who I was referred to by my franchisor, gave me all the gross sales figures and asked me to fill in my monthly expenses. I was told by the franchisor that the consultant has worked with a number of their franchisees and that they are very familiar with the franchise system and have all the numbers and business plans to help get the loan. The consultant confirmed they worked with many other franchisees within my system and they validated the sales figures. After filling out the expenses and returning the information to my consultant, I was told my net profit numbers were too low so the consultant changed some information to raise the net profit number."

"I discovered later that the lender didn't seem to care if the numbers reflected reality because as long as home prices were going up, the SBA could get their money back from closing on the homes of the borrowers."

The franchise owner continues, "I have since come to learn that the SBA requires a profit to be shown on your financial forecasts for your first, second and third years in business. Not just any profit, but a number high enough to meet the ratios required by the SBA and the banks — which is why my consultant was playing with the numbers. Those gross sales numbers that were "validated" turned out to be twice as high as what the average first year franchisee grosses in their first year within our franchise system. Essentially, the consultant "backed into" the numbers by first knowing the amount of loan needed, about $300,000, and then figuring out what gross revenues are needed to get to the proper net required numbers. If we had used the real gross numbers as opposed to the inflated, fraudulent numbers, I would never, no one would ever, get approved. I had no idea what was going on until it was too late."

The franchisee adds, "I discovered later that the lender didn't seem to care if the numbers reflected reality because as long as home prices were going up, the SBA could get their money back from closing on the homes of the borrowers.”

A Solution

Steinberg asks this fundamental question, “Why doesn't the SBA insist that the financial information given by franchisors to the banks also be given to loan applicants, that is to say the actual franchise buyer? Buyers would be in a good position to verify whether the financial scenarios for their future store were bogus or not.”

The New York attorney stresses, "This is likely to be a developing problem. The reason we haven't heard about this is because home values and the stock market were roaring. When borrowers got into trouble, they could get a housing loan. There was plenty of money. Now with the collapse of asset values, when people get into trouble they don't have the wiggle room. As Warren Buffet says, 'It's only when the tide goes out that you see who has been swimming naked.'”

Steinberg asks, "Now that they are in so much trouble, will the lenders and Small Business Administration wise up to the franchisors that have their number?"

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209 Comments

Former Franchise Administrator Gives A Second Comment by Mr. Blue MauMau

Submitted by Mr. Blue MauMau on Fri, 2009/06/26 - 07:35.

Bob Tingler is the former franchise administrator for the state of Illinois. Besides his initial comment, he has asked me to post this second comment.

I did not want to overstay my welcome with too long a comment about due diligence and getting performance information from present and former franchisees. However there seem to be some pessimistic opinions about approaching existing franchisees that I thought I should clarify my thoughts.
    When I mentioned interviewing franchisees, I meant face-to-face, repeated discussions, with as many franchisees as it takes to believe you are getting real answers to your questions. Although it may not be as valuable compared to interviews, you can also learn a lot by spending a few hours a day in the franchisee's parking lot watching the traffic and going inside for awhile to see how business is conducted during peak times. If you can do volunteer work at a franchise you should be able to learn a lot by just observing what typical days look like - even if the owner seems worried about opening up to you. At some point during your attempt to build up trust in each other, invite the owner and spouse to go out to dinner or lunch with you and your spouse. You may learn a lot more by casual conversation with the owner's spouse and in the process win over the owner.

    Find out from your local government how much sales tax was paid by a few of the system's franchisees and extrapolate what sales figures produced the tax figure. Then ask those franchisees directly for such figures (+ expenses if possible) to see how they compare with franchisor and franchisee sales figures. Try to learn how much the average customer spends with the franchisee - a figure some of the franchisees may be willing to divulge. Do the math and determine how many customers would have to spend "X" dollars to produce "Y" sales volume. Is the result humanly possible? Will your projected costs leave enough revenue to sustain your family and allow growth?
"Find out if there is a franchisee association (company sponsored or independent) and make a point of meeting the President or Board members"

    Find out if there is a franchisee association (company sponsored or independent) and make a point of meeting the President or Board members of the association(s) and try get their sponsorship to meet with franchisee members and really talk about their business. Ask if there are any conflicts with the franchisor and how the franchisor has responded to problems. Having some problems is to be expected (if they say there have been zero problems, run away), but how the franchisor deals with each problem is very critical to understanding how you will be treated.

    Look for franchise sites that are operating and for sale and approach them as a buyer who naturally will want to see the books and records, including tax returns for the business. Their attorney may want you to sign a confidentiality agreement regarding the records and business practices that they discuss with you, which should be acceptable to you so you can learn a lot more about the performance of that business. Hopefully they did not lie too much in their tax return.

    Involve your attorney and accountant in your due diligence, and depending upon where you live, look for franchise experience in each professional's background. If you cannot find local talent, working with franchise experts is important enough that you should consider using experienced professionals that work a great distance from your home by mail,fax and "Go to Meeting" type software. Travelling to their office before you make the final move to buy, will be worth the investment - particularly when you consider what it will cost to get out of a bad deal.

    If no one opens up to you because they are scared, maybe that isn't a business atmosphere you can tolerate for the next 20 years. Your most powerful asset when learning about becoming a franchisee and analyzing your business prospects, is being willing to say "no" and walk away from that deal.

Bob Tingler

Tingler's Due Diligence Tips by michael webster

Submitted by michael webster on Fri, 2009/06/26 - 20:43.

Tingler writes: "Find out if there is a franchisee association (company sponsored or independent) and make a point of meeting the President or Board members of the association(s) and try get their sponsorship to meet with franchisee members and really talk about their business. Ask if there are any conflicts with the franchisor and how the franchisor has responded to problems. Having some problems is to be expected (if they say there have been zero problems, run away), but how the franchisor deals with each problem is very critical to understanding how you will be treated."

I think that this an excellent tip, and Bob's second response frankly is much better than his first. There are a number of clever ideas in Bob's email to Don, and I would encourage people to read through them.

Also, the State of Illinois has a very good check list on franchise due diligence on their website.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Illinois checklist by Ray Borradale

Submitted by Ray Borradale on Fri, 2009/06/26 - 22:19.

That is a very good document.

The more things change; the more they stay the same.

Excellent Illinois checklist by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 22:26.

I love all the red flags. They are right on. Every zee wannabee should print this out. I wish we had this.

Re: Tingler's due diligence tip by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 21:05.

Michael, I would again argue that it is not the franchisees' responsibility to provide the financial information for the franchisor. First, there is no legal recourse (which is why the franchisors will love this solution). Second, why would franchisees want to disclose their personal data to a stranger? We all know that franchisees don't want to admit they are failing, are afraid that the person is a plant by the franchisor to see how they would respond and third, they really don't have the time to go into the amount of detail needed for full disclosure - nor should they have to. Go back to my original argument from day one. Most franchisees never qualified for the SBA loan. The revenue numbers were grossly inflated which means we all lied to the SBA (unknowingly). The numbers were either provided by the franchisors (in one way or another) or by the loan consultants that we were led to by the franchisor. Without the inflated gross revenue numbers we never would have been approved for the loan. Without true regulations the franchisors enrich themselves on the backs of the franchisees and, most important, the SBA, knowing this, is complicit in this charade.

Franchisee's Obligation by michael webster

Submitted by michael webster on Fri, 2009/06/26 - 21:55.

Oldsword writes: "Michael, I would again argue that it is not the franchisees' responsibility to provide the financial information for the franchisor"

Uh, we must be talking past each other: a franchisee has to provide monthly financial data to the franchisor by contract.

As to the SBA loans and revenue projections, you are correct.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Re: Former Franchise Administrator Gives A Second Comment by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 08:49.

So, what I gather from Mr. Tingler's comments is that franchisors have no regulatory requirements to speak the truth. That, as a Franchise Administrator, he failed to provide regulatory oversight protecting individuals from fraudulent conveyence and permitted franchisors to act with impugnity with regard to fraudulent financial information. That, essentially, franchisors are protected from any legal liability regarding providing truthful, open and transparent financial information. We now are only to rely on people who have no stake in the game. Franchisees that we cannot sue for false information. Franchisees who are more concerned with running their businesses and trying to make a living out of this scam than be bothered, time and time again, by potential franchisees who are looking to dig up dirt. Thank you, Mr. Tingler, for a job well done. You must be very proud of your tenure as a Franchise Administrator at not having accomplished anything for individual investors who are using their lifelong earnings and roof over their (and their family's) head as capital for this purchase and instead protected those that have amassed an army of attorneys, elected officials and, yes, regulators/administrators on their side. I get more protection purchasing a car or, for that matter, a penny stock, than I do buying a franchise. And this "administrator" thing is a paid position? Where can I get one of these?

Tingler just learnt that no good deed goes unpunished. by RichardSolomon

Submitted by RichardSolomon on Fri, 2009/06/26 - 08:52.

The real revelation here is the ridiculous lack of understanding of what one should/may expect from any government resource.

The resource can only do what it is mandated to do, and it can only do that to the extent that it is specifically provided a budget for it.

Tingler had no control over either of these prerequisites.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Mr. Solomon, From a legal by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 09:06.

Mr. Solomon, From a legal standpoint, perhaps you are right. However, when placed in a position of "oversight" you do have a responsibility to do more than just say "not my job". He clearly understands the shortcomings of the regulatory requirements regarding financial disclosure and is now forcing the "transparency" onto the shoulders of the current franchisees. He knew all too well what was going on and had an obligation to do more than just turn a blind eye. Since his knowledge of the situation is apparent he should have either been vocal about the problem or resigned to shed some light on this, so prevalent, issue. Instead, it appears he continued on and allowed the problem to fester and now has the gall to write to franchisees telling us to fend for ourselves. This makes Marie Antoinette almost look like Mother Theresa.

It is unfortunate that you are so ignorant of the realities of by RichardSolomon

Submitted by RichardSolomon on Fri, 2009/06/26 - 09:27.

how government(s) work. Your accusations against Mr. Tingler is the noise of ignorance, stupidity and arrogance.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

What permits scammers to fleece investors is that the by RichardSolomon

Submitted by RichardSolomon on Fri, 2009/06/26 - 09:33.

investors are so bloody ignorant. They think they understand how markets full of thieves really work because they once got a C+ in Civics class.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

disclosure is not enough by cathy gordon

Submitted by cathy gordon on Sat, 2009/06/27 - 13:19.

I agree with you but "what about the market full of thieves" we know how they work and so does mr tingler. I am in mr tingler's state. I have personally talked to him. He is right in the sense of doing due diligence, the problem is that Illinois has only a disclosure law. And item 19 is not manditory, and when he says that it has been examined over the years making it manditory at different times by the FCC yet they say it will not stop the fraud, but would supply evidence in a court of law. That is good enough for me. That is what is lacking. When Franchisors have to account for what they say then you will be starting to reel in the problem. Now there are more bad franchisors than good. That and the ability of the zor to seal settlements so their is no caselaw against them. the system stinks. it does not go far enough. Even though Franchise Disclosure Law in Illinois is better than in many other states (only 15 even have it) That does mean that it is sufficient. What we need is Franchise Law not Franchise Disclosure Law.

What permits scammers to fleece investors is the by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 10:04.

lack of transparency - a creation of a lack of regulation. None of us are trying to "outthink" the franchisor. Almost all of us hire attorneys and accountants to evaluate the information. How many times have you stated, Mr. Solomon, that they way the information is presented makes it impossible for anyone to get a true read on the subject. We don't "know" we are not getting the true read. We believe the information provided. A "market full of thieves" as you call them, is allowed to perpetuate when their are few to no regulations. Yes, it is a market of thieves all the more reason for regulators to do their jobs.

You can keep it up by Ray Borradale

Submitted by Ray Borradale on Fri, 2009/06/26 - 14:35.

Bashing regulators for life will waste your time but it difficult not to. But it won't change anything. It is the franchising myths of ‘guaranteed success', ‘honesty' and ‘regulation = protection' that lead prospective franchisees to take from whatever level of due diligence they perform [or don't perform] what they selectively choose. Whether the reason for non-regulation and ineffective law is ‘corruption' or ‘economic consequence' is fleeting commentary - ain't going to change anything,

The things that may change protection of scam franchising is when there is a cost to someone other than franchisees and suppliers - tax payers, voters and politicians. But I would not hold my breath and I would keep bashing regulators. Any commentary that points to any elements of dangerous franchising educates.

The more things change; the more they stay the same.

Tingler did a good job for the public by Paul Steinberg

Submitted by Paul Steinberg on Fri, 2009/06/26 - 09:23.

Tingler did a lot of good work during his time in government, and I would rate him along with California and Cantone (of Maryland) as a regulator who views education of consumers as part of being a good regulator.

Tingler's advice is conventional advice which any decent attorney or CPA would give their client. And I don't know what "fraudulent conveyance" you are speaking of; the only time I know of something which potentially was fraudulent conveyance was the Snowden to Morgan (Cuppy's) case, which was a Florida franchisor. Tingler was in Illinois.

Not every state franchise regulator just sits on their butt and waits to collect a pension. Some of them do a good job which benefits their citizens and the franchisee purchasers. I would put Tingler in that category.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Re: Tingler did a good job for the public by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 09:52.

To Both Mr. Solomon and Mr. Steinberg: We all seem to acknowledge the impossibility of performing proper due diligence given the dearth of financial information provided by the franchisor. In some past comments (from both of you) it has been clearly stated that not even accountants understand how to analyze the information. Perhaps my comments were a little "harsh". However, telling an investor to "find it out for themselves" and then feeling as though you did your good deed is not government oversight. Especially when franchise attorneys state that it is almost impossible for the franchisee determine the financial truth even when he has hired an accountant, an attorney AND contacted franchisees (who, we all seem to agree, are not exactly forthcoming). Regulators are put in place to provide regulation and oversight that protects the public. If they are not there to protect the public then there is no need to regulate, now is there? There comes a point, when a regulator knows all too well that the cards are clearly stacked against the public, that they need to be VERY vocal or else they provide little to no value. Sorry, but he clearly understands the problems facing franchisees regarding financial disclosure. Just telling me to contact current franchisees (who again, have no skin in the game) is not helpful. Think about the SEC telling investors that public companies can say whatever they want and, if you want to invest, contact another investor of the same stock and ask him how the stock has performed. Add onto it that franchisors "guide" franchisees with financial information all the time and it adds up to one big farce.

SEC and FTC by michael webster

Submitted by michael webster on Fri, 2009/06/26 - 20:29.

Oldsword writes: "Think about the SEC telling investors that public companies can say whatever they want and, if you want to invest, contact another investor of the same stock and ask him how the stock has performed. Add onto it that franchisors "guide" franchisees with financial information all the time and it adds up to one big farce."

Uh, the SEC is protecting passive investors, has standards on finanical disclosures and exists to protect the viability of the secondary market and not just the investing public. The investment contract notion of "due diligence" is a defence which allows brokers to rely upon certain types of representations made by the issuer in order sell the security on the secondary market.

The FTC has no such comparables. You get your disclosure and you take your chances if a) you attempt to figure it yourself, and b) you are too cheap to find someone to assist you. Simple: buyer beware, even when disclosed.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Re: SEC and FTC by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 20:55.

Michael, as I stated in my comment "Think about it. . ." I am not claiming it is exactly the same thing however it is similar. The only reason the standards are different is due to the political pull of franchisors AND the incohesive nature of the franchisee community. Franchisees tend to circle the wagons around their own franchisees and don't look any farther. It is this myopic practice that will keep franchisors in control. Don't forget, by its very nature, there are more franchisees than franchisors, we just need to show them that

Why do you continue to flout your ignonrance? by RichardSolomon

Submitted by RichardSolomon on Fri, 2009/06/26 - 10:03.

It is not true that competent pre investment due diligence is impossible. It is available to any who are willing to pay for it. If you didn't get that help, that is only your fault - not the government's.

And if you are from Illinois, as it seems from your post, you are even more ignorant if you don't know that Tingler can be Jesus Christ and not have the legal authority or resources to effectively police the market.

His indirect bosses included Sen Burris, the shyster former Illinois attorney general who indirectly purchased Barack Obama's senate seat from the thief Rod Blagojevich. Anything in Illinois can be fixed without Tingler ever ever hearing of it - even if he did get complaints and even if he did have resources - which he didn't.

The SEC really is an instance of government corruption at the highest levels. That tells you what you can expect by way of government protection. I am now beginning to doubt that I gave you a low enough grade in high school civics.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Re: Why do you continue to by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 10:20.

Flout my ignorance? This is coming from the attorney who so proudly stated in an earlier blog that franchise contracts have been written by great attorneys to prevent any sort of legal remedy on the part of the franchisees AND that if we want justice, go to the seminary school. Not to mention that you, yourself, stated in a blog that the financial information provided by the franchisor cannot be analyzed by an accountant the same way as they normally are allowed to do (and we are supposed to know that how?) This is regulation? An investment in the hundreds of thousands (and sometimes millions) and it is up to the franchisee to 'guess'? The numbers are known by the franchisor, you are well aware of that. You are also well aware that the financial information we, as franchisees, is fudged to guarantee loan approval. And, no I am not from Illinois. However, there are enough complaints around the country that every franchise regulator is aware of the problems. Again, they have a public stage at their disposal. If they wanted to help cure the problem there was an opportunity rather than telling me to "phone a friend".

As Mario Lavandeira says... by Paul Steinberg

Submitted by Paul Steinberg on Fri, 2009/06/26 - 15:57.

Flaunt it! Flaunt it!

You may flout convention, but you flaunt your ignorance.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Aw Geez! Did I do that? by RichardSolomon

Submitted by RichardSolomon on Fri, 2009/06/26 - 16:28.

Thanks for the reminder

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Mario Lavandeira and Aw Geez! by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 19:45.

So, where do we go from here? Do franchisees remain complacent/silent? Do we continue to be politically correct and play nice? Back in 1996, the Tim Bates report came out. A very thoughtful, well researched and intelligent report proving the weaknesses in franchising. Franchisors shouted it down as essentially a hack job. Nothing was done. Mr. Bates then speaks to a Congressional Committee in 2000. Again, very respectfully, he provided a well researched, professionally prepared and delivered statement where he was told to try and "wrap it up quickly". (His comments were immediately followed by DENNIS E. WIECZOREK, ESQUIRE, PARTNER, RUDNICK & WOLFE, CHICAGO, IL. where he tried defending franchisors with one of the following comments: "Krispy Kreme has told me that if legislation along the lines of what we have heard about and seen in prior years is passed, that they would cease franchising immediately." Rather amusing that Krispy Kreme was used as a "stand up" franchise.) What was the result - again, nothing. Then in September 2002, the SBA's Office of Inspector General's Inspection and Evaluation Division publishes a report, again, very well researched and professionally and respectfully presented that concluded "Despite the popular view that franchisees are much more successful than non franchisees, SBA's experience with defaulted loans does not support this." The result of this - again, nothing. This report prior to being published (it was circulated within SBA for comments) was met with a letter from James Rivera, Associate Administrator for Financial Assistance (a department within the SBA) dated August 23, 2002 stating: "A member of my staff conducted a similar study and analysis of the SBA loan database for the same period under inspection and came to the same conclusion supported by your finding related to the relative success of franchise versus non-franchise loans." The result from our great representatives and regulators down in D.C. - deafening silence. I mentioned in a previous post that franchisees need to band together. We need to compare information among various franchise systems because they are all doing and saying the same thing. (I will loosely use the word "collusion".) We need to speak up and not allow the franchisor community to use their "divide and conquer" strategy. Allowing them to separate us and fight in small individual ways only weakens us. My comments today are meant to wake franchisees up. Being told by a government official that the only way we are going to get the truth about the financials of a franchise investment is to speak with franchisees is a disgrace. Essentially, we are told that franchisors can get away with what they want with regard to financial information. Franchisees NEED to speak up and not just accept the status quo.

Wake up franchisees? by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 22:20.

I am afraid many more zees will have to be fleeced before zees wake up and band together. Instead of tens of thousands it will be more in the millions.

Through my research and talking to other zees in different systems the stories are all alike. It is sad but true.

The way rogue zors do business is a disgrace. Giving earnings claims that are highly inflated to SBA loan officers is unethical and they know it. The zors only want what they want. That is your money.

The justice system is a disgrace. Zee's should be able to present their cases without feeling like they don't have a flying fart of a chance to obtain justice.

I don't believe zees haven't spoken up as far as blogging on sites. I believe many don't see any solutions to the problem. We can write our congressman and senators and all we get is a form letter with their signature. Besides when zees speak on sites they get bashed and many people cannot take it. I don't care because they have taken my good name away, retirement and my other sources I plan for retirement. I have to start over. After being established for years it hurts.

I hope for now people will read and take their time. Perhaps they will be cautious and not believe any sales person.

Off topic, comment moved by Guest

Submitted by Guest on Sat, 2009/06/27 - 03:41.

This comment thread is way off topic and has been moved here. Mr. Blue MauMau Moderator

Re: Wake up franchisees? by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 22:23.

"I am afraid many more zees will have to be fleeced before zees wake up and band together. Instead of tens of thousands it will be more in the millions." Millions huh! Are you out of your mind?

Millions huh! by Ray Borradale

Submitted by Ray Borradale on Fri, 2009/06/26 - 22:33.

No Barbara; franchising scams are going to come to a halt at 999,999.

The more things change; the more they stay the same.

Ray look at history by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 22:41.

People tend to be compliant until they really see the truth about what is going on. It has to be as transparent as a person who robs a bank. People will not stand up until it effects their family.

I never had a clue of all the happenings in franchising until our family got involved. You never read about franchise fraud in everyday news. Perhaps things will change because of the internet. I certainly hope so.

I hope not millions by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 22:29.

It seems zees are not banding together to make a change. I would love to see a strong leader and thousands of former and existing zees fight the wrong doing to many zees.

Re: I hope not millions by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 22:53.

Barb said - "It seems zees are not banding together to make a change. I would love to see a strong leader and thousands of former and existing zees fight the wrong doing to many zees." Is it thousands, millions, hundreds, less or more...I'm confused? Do you have a clue?

If it is tens of thousands getting hurt by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 23:01.

Why isn't anyone doing anything to change things?

I know BMM is but the people need to act.

Re: If it is tens of thousands getting hurt by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 23:07.

What if it is only 250? You have no clue do you...it is all a guess for you isn't?

When you ask me, "What if it is only 250?" by Barbara Jorgensen

Submitted by Barbara Jorgensen on Sat, 2009/06/27 - 01:20.

It reminds me of the story of Lot in the Bible. When Lot asked God if there is 10 righteous men will he destroy the city?

In my way of thinking is if a person robs one bank, is that enough to send him to prison?

If you hurt one family that is too much! All the hurt zees say AMEN!

Re: When you ask me, "What if it is only 250?" by Guest

Submitted by Guest on Sat, 2009/06/27 - 03:44.

This comment has been moved here.

Point of order by Boudica

Submitted by Boudica on Sat, 2009/06/27 - 01:01.

I thought Barbara's millions reference was in relation to zees who had been/could be fleeced and thousands was in reference to how how many she would like to see band together. Tyrone, in his haste to tap out futher insults ( have you seen how quick this guy is to post his replies to barbara? must sit there waiting?) seems to have overlooked this.

Mr Bean, I would have hoped being such a successful business man as you claim to be would have taught you how to be a bit more of a gentleman but the unneccesary post from you shows you are instead like some kind of monkey who throws stones just because you see another monkey do it.

Mr Tyrone Malcom III, Tyrone I and II are looking for you. They say they are sick of being confused with a man who can't make his point without personally attacking people.

Barbara, (welcome back to your identity by the way) Paul Is right. It can be much more effective to simply link to a previous article or discussion to make your point but remember that having someone agree with you in another discussion does not mean that the agreed point is a given fact.

I tried looking for the conversation with Ray by Barbara Jorgensen

Submitted by Barbara Jorgensen on Sat, 2009/06/27 - 01:12.

I couldn't find it.

It was speculation. By the way do they have manatory arbitration for zees in Austrialia?

Ray and I discussed this by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 23:27.

not too long ago.

Re: Ray and I discussed this by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 23:32.

You embarrass yourself.

I am not embarrassed by Barbara Jorgensen

Submitted by Barbara Jorgensen on Fri, 2009/06/26 - 23:42.

I know what unfair business practices are. I know what fraud is. I know that many families have been hurt because of all the stories on the internet from different countries. The sad part is the bad is getting away with it. The one's who have a chance in litigation I really hope they win.

Comment moved by Guest

Submitted by Guest on Sat, 2009/06/27 - 03:51.

This comment has been moved here. Mr. Blue MauMau Moderator

Barbara Jorgenen = Do Dil (?) by Granville_Bean

Submitted by Granville_Bean on Fri, 2009/06/26 - 23:47.

So if you know what they are, what are you doing besides crying about it???

It is Jorgensen not Jorgenen by Barbara Jorgensen

Submitted by Barbara Jorgensen on Sat, 2009/06/27 - 01:52.

I just reached my goal of 2000 points of blogging and commenting. I have been doing what I can do. By writing comments I am hoping people will not get hurt. Am I crying now? No. I am moving forward but will never give up my right to free speech. I will be successful again.

Comment moved by Guest

Submitted by Guest on Sat, 2009/06/27 - 03:53.

This comment is way off the topic of the article and has been moved here.

Do Dil is gone. by Barbara Jorgensen

Submitted by Barbara Jorgensen on Sat, 2009/06/27 - 00:39.

I am a person that has experienced franchise fraud. My experience is first hand. I am willing to share what I have learned so others will not get hurt

Beany what is your purpose to put other's down to show how smart you are?

I am here, a common layman,relating to the people on their level so they can understand how easily it is for the hard working people of our country to get hurt doing business with less than ethical zors.

I must be doing something right to have people goating me.

Hopefully I will be able to share some of the knowledge I have obtained from my research. If I am wrong the experts and lawyers will correct me.

Beany stop being offensive by Barbara Jorgensen

Submitted by Barbara Jorgensen on Sat, 2009/06/27 - 00:37.

Can't you believe franchise fraud has hurt people? I really hope you never get hurt. You may have money now. I have said it many times. No one is free from getting hurt emotionally, physically or financially. A major illness can wipe out a person financially. I suggest you start having alittle bit of a heart. It might be impossible for people like you.

Barbara: Use hyperlinks please by Paul Steinberg

Submitted by Paul Steinberg on Fri, 2009/06/26 - 23:38.

Barbara:

I think what Tyrone is trying to say is that a dismissive comment such as "Ray and I discussed this" contributes nothing to the conversation.

Leaving aside that your discussion with Ray Borradale is unlikely to be dispositive in the minds of most BMM readers....

ummm... use hyperlinks!

At very least, link to the relevant comments.

If you don't have a WYSIWYG box and don't know HTML tags, ask Mr. MauMau to give you a WYSIWYG box.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Paul, how much franchising data is collected in the US by Ray Borradale

Submitted by Ray Borradale on Sat, 2009/06/27 - 00:07.

In Australia we collect nothing so everything is anecdotal and thanks to growing communications between networks. It seems our ACCC and FCA don't want to count.

The more things change; the more they stay the same.

What makes it almost impossible by Barbara Jorgensen

Submitted by Barbara Jorgensen on Sat, 2009/06/27 - 00:51.

to know the exact data is that most cases go to arbitration. There is no record of those cases. I do know from my research many zees are not willing to go to arbitration because they do not trust our system. They have had lawyers tell them outright they will loose in arbitration. The stories will shock you.

The only solution is to negotiate the arbitration clause. If they don't want to add an addendum that it will be changed to litigation run as fast as possible.

Re: Mario Lavandeira and Aw Geez! by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 20:31.

"Essentially, we are told that franchisors can get away with what they want with regard to financial information. Franchisees NEED to speak up and not just accept the status quo." Alternatively prospective franchisees could perform reasonable due diligence and reject franchisors that do not prove to prospects that they are worthy of investment?

Re: Re: Mario Lav by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 20:48.

Been thru this with you. I hired a franchise attorney and an accountant. The way the information is layed out it is impossible to determine the truth about the franchise financials - although at the time you don't realize it. The accountant's qualifications are excellent: a business accountant, a business valuator and accounting consultant to a Fortune 100 company. Even he didn't realize how the numbers TRULY worked until after it was too late. As Richard Solomon stated in one of his posts regarding this subject: “Accountants who know all about Sarbanes-Oxley and SEC rules know nothing of franchise financial disclosures of Item 19/information given out to be used in business pans. Franchising disclosures represent a discrete specialty. Either you know about how to evaluate it or you don't. You can have a PhD in any discipline you can think of, but it doesn't qualify you to vet franchise investments." This is someone who knows the information cold. The rest of us don't know how the scam works until it is too late.

Re: Re: Re: Mario Lav by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 21:00.

It would help to know what concept you bought?

Re: Re: Re: Re: Mario Lav by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 21:08.

Tyrone, While I do appreciate the fact that this information would help our discussion, I am, unfortunately working with lawyers and have not filed yet. Hopefully, I will be able to disclose in the future.

Re: Re: Re: Re: Re: Mario Lav by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 21:18.

What makes you think you have a case?

Re: Re: Re: Re: Re: Re: Mario Lav by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 21:26.

Would rather not go into it.

Re: Re: Re: Re: Re: Re: Re: Mario Lav by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 21:31.

Okay maybe you should refrain from posting altogether?

Re: Re: Re: Re: Re: Re: Re: Re: Mario Lav by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 21:39.

sorry for taking so long to respond - I was too busy laughing.

Re: Re: Re: Re: Re: Re: Re: Re: Re: Mario Lav by Tyrone Malcom III

Submitted by Tyrone Malcom III on Fri, 2009/06/26 - 21:45.

Don't choke! You have become so intelligent after becoming a franchisee!

Role of IndFA by michael webster

Submitted by michael webster on Fri, 2009/06/26 - 20:10.

Now that the IndFA's are listed in the FDD, they should be taking charge on issues like this.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Re:Role of IndFA by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 20:20.

Michael, Sorry, I'm not sure I understand your comment

IndFA and Due Diligence by michael webster

Submitted by michael webster on Fri, 2009/06/26 - 21:57.

It is in the interest of the IndFA, but not each of its members, for the IndFA to publish due diligence tips on the franchise system.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Re: Continue by jd

Submitted by jd on Fri, 2009/06/26 - 10:50.

'And, no I am not from Illinois. However, there are enough complaints around the country that every franchise regulator is aware of the problems.' I guess now it's the responsibility of the franchise administators to frequent websites like bmm, and to start researching complaints based on information that some anonymous person writes on here. Or in your case, a franchise system that we don't even know, so might as well research them all. Being from IL and knowing the budget crunch that the state is going through (thanks to inept leadership by the Democrats controlling all major offices the last couple of years), the franchise office is probably one of the last concerns that people in this state have. If you have major concerns relating to franchise regulations and the state of IL, maybe you should take it up with the Attorney General's office (which oversees the franchise dept). She'll be running for US Senate or Governor next year, and is said to be Obama's choice to run for Senate.

Re: Re: Continue by oldsword

Submitted by oldsword on Fri, 2009/06/26 - 13:32.

JD you might want to read Mr. Tingler's first blog from several days ago. In it, he discussed how providing financial information to franchisees has been a problem for decades. He is fully aware of the problems of financial disclosure. According to his second comment, the current franchisee is responsible for providing me with the relevant franchise financial information. As I said before, franchisor financial disclosure has now been relegated to "phone a friend".

Re: Tingler by jd

Submitted by jd on Fri, 2009/06/26 - 09:33.

Don, this is a little off-subject, but is there any way that Bob could give us an idea of how many 'franchise' related complaints he received on a yearly basis and what the typical results were with those complaints? I think it's of interest to people here to know what role a state franchise regulator does within his office. I noticed that in 2005, IL had 1,666 franchises and franchise brokers registered with the state.

Okay dammit I'm gonna ask again. by Granville_Bean

Submitted by Granville_Bean on Mon, 2009/06/22 - 21:53.

So the Zor (or the broker who "places" financing for the Zor's marks, I mean prospects) basically submits a "liar loan" for the prospective Zee? Well that is pretty darn shocking. But in the end the Zee signs for said loan. SO WHAT NUMBERS IS THE ZEE USING? Do the Zee's numbers say they can service such a loan? Now, the earning or ROI of the Zor don't do squat for projecting the performance of a single Zor store. NOR DOES THE "AVERAGE" performance of Zee stores (at least not BY ITSELF) even if you could get it. How would you "know" your outlet is average (without further analysis)? (And BTW, why are people surprised that when they call up a bunch of existing Zees, you can't get their numbers? If a stranger cold called you on the phone and asked you how much money you make, and let's go into detail about it, would you tell them? How does the existing Zee even know who you really are, maybe you're a competitor thinking about opening across the street, or a nosy neighbor.) So dammit, at least run TRY to YOUR OWN numbers. You make projections and they never all turn out to be accurate, so then you adjust, but dammit at least START with your OWN numbers. What kind of sales do you project you will do, what about every line of your expenses, and from that you project a net? And how much does that say the business will be worth, and how much of a loan will you be able to support and is worthwhile to take??? You may turn out to be high, low or right on, but at least TRY. As I've said before, I don't like SBA loans. If the deal really was good it should not need SBA. There is too much incentive in the franchise financing industry to steer deals into SBA and get the loans closed, even if the deals actually suck.

Where do we get our Projections from? by oldsword

Submitted by oldsword on Tue, 2009/06/23 - 08:35.

Who are most start up franchisees? Where do they come from? Most are NOT previous business owners. They have worked for a while and have been somewhat successful in their own specialty in order to have saved enough money to meet the financial requirements of purchasing a franchise. They don't know what to expect in sales - by any stretch of the imagination. As you said, calling other franchisees is essentially worthless. So where the heck do you think they get the numbers from?!! Do you think they just pull them out of thin air? They are "guided" by the franchisor's sales team OR directed to a specific loan consultant that "has all the numbers" OR BOTH!! If franchisees were true businesspeople we would start our own businesses at much less cost and without having to give up half our net profit. BTW, do you really think that all these franchisees just miraculously came up with just the right gross sales number to ensure SBA loan approval? Whether you like SBA or not, most of us do not have the capital or expertise to qualify for a regular bank loan - which, BTW, is one of the requirements for issuance of an SBA loan - you can't be able to get a regular bank loan. But THE MOST IMPORTANT POINT OF ALL OF THIS IS: None of us would be in this position of losing a substantial portion of our net worth, declaring bankruptcy or home foreclosure if the REAL gross revenue numbers were available to us and used on our application because we would never have qualified for the loan. From there we would never have been able to sign a lease, purchase the franchise "requirements" (signs, machines, tables, whatever), never done the buildout, OR put our homes up as collateral. We would have lost the franchise fee possibly, but right now $45,000+ loss would have been a hell of alot better than the $1,000,000 hole I am in. AND I AM IN A SYSTEM THAT WAS NAMED A TOP FRANCHISE (you should hear of the # of closings and owners not making a dime). Imagine if I bought one that you guys claim are from "rogue" zors.

SBA Loan Fraud by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 22:32.

The Bean asks: "So the Zor (or the broker who "places" financing for the Zor's marks, I mean prospects) basically submits a "liar loan" for the prospective Zee? Well that is pretty darn shocking. But in the end the Zee signs for said loan."

Gee Bean, I am glad that you have reading. Are you suggesting that since the Zee signs for the liar loan, the liars are somehow off the hook?

Or, contrary to your usual pose, are you suggesting that the Zee actually get professional help from those of us who specialize in this area?

Or, more likely, are you just one of those people who have to flaunt "I have got mine so why cannot you get yours?"

Since you never offer any practical advice in a form that anyone would take, why don't you make like the birds, eh?

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Comment moved by Guest

Submitted by Guest on Mon, 2009/06/22 - 13:40.

The comments on selling franchises is off the topic of this article and has been moved to the appropriate forum area. Mr. Blue MauMau Moderator

Former Franchise Administrator Replies to Story by Mr. Blue MauMau

Submitted by Mr. Blue MauMau on Sun, 2009/06/21 - 07:19.

Editor's note: After reading this news story, Bob Tingler emailed me his observations. Attorney Tingler is the former Franchise Bureau Chief with the Illinois Attorney General's office. For many years Tingler was the person in charge of safeguarding the interests of franchisees while he led Illinois' efforts to administer and enforce franchise and business opportunity laws. His email below addresses red flags in buying a franchise and past efforts in regulating earnings disclosure.

These are hard lessons learned that too often are not passed on to new prospects. It is unfortunate that prospective franchisees frequently believe that franchise regulation is a stamp of approval for each franchise system being offered. There are benefits that flow from existing regulations and they have grown from experience and a belief that franchising is a unique form of doing business that should have some basic protections, as compared to the new prospect that wants to own their own business and buys a non-franchise enterprise from an existing owner. The person who starts their own business from scratch, or buys an existing business, seems to better understand that critical information is not automatically required, deceptive information may be volunteered and a lot of due diligence is essential.

"The mere fact that a franchisor would try to make a quick sale and not make a great effort to be sure the prospect understands exactly what they are getting into should be a red flag that causes a buyer to look elsewhere."

There is no excusing the fraudulent franchisor, broker or catatonic banker, but the prospective franchisee has to take the mandatory disclosure document for what it is - a head start for the buyer, who must go much farther in gathering information and not be lulled into thinking that their new, experienced "partner" (the franchisor) and the other cast of characters, are friends rather than salespeople who are determined to close the deal.
A good franchisor will force prospects to ask a lot of pertinent questions because management knows that a well informed, team player will make a long term, good franchisee. The mere fact that a franchisor would try to make a quick sale and not make a great effort to be sure the prospect understands exactly what they are getting into should be a red flag that causes a buyer to look elsewhere. When the franchisor claims it forbids its representatives from providing performance data for its franchisees, but someone gives out the information anyway, the prospect should break off negotiations. If the franchisor in fact does not provide such data, the prospect should seek the information from as many existing franchisees as it takes to be satisfied that a buying decision could be partially based on the performance of the desired franchise system.

"None of the regulations and additional due diligence will insulate the franchise buyer from people who intend to mislead or defraud. "

There are virtually no hints in the threads to this article, that indicate due diligence included face-to-face interviews with existing franchisees to learn what their experience has been regarding the franchisor's conduct; the actual performance of the existing franchises; and the prognosis of those franchisees as to what their business will look like in five or ten years. I know lawyers and accountants, including some who already have personal business experience, who will never enter a business deal for themselves without consulting knowledgeable experts and doing their own investigation of what is being offered. They will not make a personal guarantee that includes their home, without considerable evidence that the proposed venture could work and that the seller's information is valid. However, none of the regulations and additional due diligence will insulate the franchise buyer from people who intend to mislead or defraud.
About fifteen years ago there were serious discussions among state and federal regulators about making Item 19 [store earnings claims] disclosure mandatory and the subject came up again during the FTC's most recent decade of rulemaking procedures. This proposed regulation was determined to be unworkable. Even if this rule was implemented, it would not have cured the problem of the unethical franchisor or broker, although it might have provided more proof to a court of law.
The #1 recommendation I have made to hundreds of prospective franchisees and attorneys representing them is to interview several existing franchisees and a few former franchisees, and to pick the most cooperative and knowledgeable franchisee to ask if the prospect could work along side the franchisee for free during a two week period to learn more about the business and verify the prospect desire to buy.
Buying a business, and particularly deciding to take on a any kind of a "partner," should be as significant a decision as getting married, but we all know of people who have not been cautious enough before making either choice.
Bob (Tingler)

Former Franchise Administrator Responds by Guest

Submitted by Guest on Sun, 2009/06/21 - 08:32.

I was the original first post so I would like to respond as well. Called about 15 zees and none were forthcoming. Didn't want to talk about their "actual" numbers. As with most franchise agmts there is language about disparaging the franchise. I spoke with some of them after being in the business for a bit and they opened up. They were unwilling to speak up because they didn't know if the franchisor was calling around to see what people would say. As an aside, I was very honest when people who claimed they were prospects called me. A few months ago one wrote me apologizing. They didn't listen and purchased one of these things. They believed the others who didn't give them "full disclosure". This new franchisee was about to close because they didn't come close to the projections and were about to lose everything. Its easy to say just do this or that. In fact, that is even what most franchisors do. Unfortunately, without it being regulated it is almost impossible to get the real read. This is not a business relationship of equals. Never has been. Who believes that anyone would spend this kind of money, give up what equates to half of net profit for a normal business, if they new how to do a start up on their own. Yes, we are neophytes. Not denying that. But when accountants (yes, even attorney Solomon agrees with that), regular attorneys and college educated professionals (new franchisees) can't figure out the problems until it is too late then there is a major issue at hand.

There is always a major issue at hand. The seriousness by RichardSolomon

Submitted by RichardSolomon on Sun, 2009/06/21 - 09:48.

of the real issue can best be vetted by asking yourself "How many small business investments have I personally vetted in my life?

When the answer is NONE, that shows the seriousness of the issue.

The reason that is the first and most important major issue is that your inexperience/your lawyer's or accountant's inexperience in vetting franchised small business investment oportunities shows that it is simply IMPOSSIBLE for you/you and those people to do a proper/competent job of due diligence.

Far too much stock is placed in interviewing franchisees, past and present. Past franchisees probably have signed non disparagement agreements as part of their being allowed to leave the system, even if their leaving was through the sale of their business (which must be approved by the franchisor who will not approve without all sorts of covenants). Present franchisees don't know who you are or if what you tell about your intent is truthful, reliable. They are relectant to speak openly. Too many bad franchisors send agents provocateurs around from time to time posing as investors to see who is trash talking the deal - for purposes of revenge.

The old assumption that talking with franchisees was a respectable due diligence tool is now known to be unreliable. Talk to them. It can't hurt. But understand that what you hear from them is not investment decision reliable, especially if it is only a telephone conversation.

Bottom line - only deal competent due diligence as well as law competent due diligence has any potential to reduce critical investment risk. You pay more for that. If you think that by saving those fees you are still reasonably capable of protecting yourself, you are simply delusional.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Comments moved by Guest

Submitted by Guest on Sun, 2009/06/21 - 10:14.

This comment thread went off topic and has been moved here. Mr. Blue MauMau Moderator

There is always a major issue. . . by Guest

Submitted by Guest on Sun, 2009/06/21 - 10:43.

Mr. Solomon, I am in total agreement with you. I was responding to the remarks made by the Franchise Regulator regarding conversations with franchisees. Some commentators on this blog attack the messenger because they can't attack the message. Forced financial disclosure would go far in preventing this charade from continuing. As I mentioned in a posting yesterday, franchisors have easy and ready access to gross revenue totals by each and every franchisee. Simply have them list gross revenue numbers by each first year brand new established business zee on a plot line (as opposed to including new zees that purchased an existing site) and draw the bell curve. It is very easily done. Take the middle 75% to 80% thereby eliminating the bottom and top 10% on each side which would prevent the "skewing" of the numbers by very poor and high performing zees and then find the average of gross revenue of that middle 75-80%. Then you will have a realistic revenue number from which to work. Instead, the franchisor wants to use numbers attained by the top 2-5% (if the numbers are attained by anyone at all) so that the loan will get approved. This is not difficult to do. A very simple computer program can do this is in minutes if not seconds.

Re: There is always a major issue. . . by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 16:24.

"As I mentioned in a posting yesterday, franchisors have easy and ready access to gross revenue totals by each and every franchisee. Simply have them list gross revenue numbers by each first year brand new established business zee on a plot line (as opposed to including new zees that purchased an existing site) and draw the bell curve. It is very easily done. Take the middle 75% to 80% thereby eliminating the bottom and top 10% on each side which would prevent the "skewing" of the numbers by very poor and high performing zees and then find the average of gross revenue of that middle 75-80%. Then you will have a realistic revenue number from which to work. Instead, the franchisor wants to use numbers attained by the top 2-5% (if the numbers are attained by anyone at all) so that the loan will get approved. This is not difficult to do. A very simple computer program can do this is in minutes if not seconds." Your simple solution is unworkable since it doesn't take into consisderation that units built over time will have different unit economics than stores built recently and only considers gross sales. Additionally, true modelling requires verifiable P&Ls from every unit using the the same chart of accounts and exacting accounting standards which most franchise systems do not have. Which is why when franchisors do provide Item 19 FPRs with EBITDA composite P&Ls they use company stores. Finally, most simple answers, such as yours, to complex problems are usually wrong. Your conclusion is half-baked and poorly thought out. I always find it interesting that people that have no experience in running franchise systems can make broad assumptions absent direct knowledge!

Re:Re: There is always a major issue by Guest

Submitted by Guest on Sun, 2009/06/21 - 17:26.

First, this was a reference to an earlier comment where I said do this for each year thereby controlling the "units built over time". In fact you can lump the last two or three years together since the cost of building units within a two or three year period should remain somewhat constant. Should the franchisor change requirements during the time period then only those with the same requirements should be included. Also, since establishing a two or three year time period you also control for most economic disruptions because most recessions end within a 10 - 14 month period. It is also VERY easy for software to recognize zip codes or states thereby taking into account regional differences should the revenue numbers differ dramatically from one region of the country to the next. As for expenses, separating out by region (again, a very easy software solution) the two largest expenses which also vary by region can be accounted for: rent and payroll. The franchisee can input the expenses (the franchisor can certainly roll out the entire list of expenses without the numbers since they have businesses of their own and franchises are supposed to be proven successful business models). If the zee knows what expenses to expect they then have teh responsibility to look up what the cost will be (damage insurance in Florida is more expensive than the northeast due to hurricanes). As business increases so will the cost of additional products that need to be purchased. Again, the zor is supposed to KNOW their business and therefore should be able to state that if your sales have moved from $20,000 per month to $30,000 per month expect to purchase additional inventory of approx "x" amount. This is NOT rocket science (although given the intelligence level of those zors on this site maybe I need to recognize that everything is relative). As for using company stores, there is something called "economies of scale" that I am sure you are familiar with. My zor has many company sites concentrated within a specific area. One newspaper ad covers many multiple sites and therefore marketing costs per site are lower. They also do not hold themselves to the same building requirements which again lowers their cost. They can move personnel around from one site to the next when need be so personnel costs can be manipulated. Sales are higher because they use a complete corporate staff to assist their sites in marketing, outreach and sales which a zee with an individual site is doing all by themselves. The fix IS fairly simple. The franchisor doesn't want to do this because it will get the real information out there. When the financials are disclosed then a discerning buyer will look to see which system is better. You know, just like investments. The requirements of disclosure are out there enabling a buyer to decide coke or pepsi. Franchisors don't want that. It would limit the true "attractiveness" of the franchise investment to a relative few.

Re: Re:Re: There is always a major issue by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 17:38.

Again you oversimplify the variables involved. Have you ever built a FTC compliant Item 19 FPR or is this just your theory? Have you researched current FPRs that are in FDDs? Are you just talking out your posterior?

Tyrone, Why can a by Guest

Submitted by Guest on Sun, 2009/06/21 - 18:13.

Tyrone, Why can a multibillion dollar international conglomerate with multiple subsidiaries, products, manufacturing and distribution centers, offices, separate staff for each product, multiple layers of staff for each product, meet all the regulatory hurdles forced upon them by FASB and the SEC and a damn franchise system whose accounting is a thousand times less complex can't do these simple procedures. Franchisors collect this information from zees every month via the computer. This is not reinventing the wheel - it is simply taking information from column A and moving it to chart B. Determine the state where the site is located. OK you now know what region of the country the financial information will be downloaded into. Year and month of the information. Ok you now know what month the information will be placed in. Gross revenues go to column X. Break the information into thirds for item 19. You have total zee sites of x. If you can't divide by 3 I can assure you the computer can. The computer can count too so it knows that gross revenues of 20,000 is greater than gross revenues of 19,000 and thereby breaks it all down into bottom third, middle third and top third. Again this is NOT rocket science. If you are having trouble doing this try your local college. You can probably hire a damn summer intern to write the program for you. Most important, by the franchisor stipulating the start date for each specific franchise the computer can tell if the numbers are coming from a center open less than one year or more than one year (yes Tyrone, the computer has a calendar also). You can then tally the first year zee numbers to come up with the averagesfor a first year site. By the way, you guys already do. You just don't want us to know them. It makes inflating the gross revenue numbers on the SBA loan application that much easier.

Re: Tyrone, Why can a by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 19:11.

Many franchisors are small enterprises, they do not have all the resources you claim that they have, not all franchisors collect the data that you believe that they collect and you neglect to point out all those franchisess that fail to report anything more than royalty sales, oh and some under-report. Heck, many franchisees keep no records (except what the throw together at tax time) or very poor records. The public companies you mention pay a fortune to meet SEC and Sarbanes-Oxley requirements and they still may choose to not make an FPR. I think that franchisors that have a 'reasonable basis' to offer a FTC compliant Item 19 FPR should endeavor to do so, however it should remain optional. And prospective zees can always restrict their options to zors that have FPRs. Again you are talking out posterior!

Re: Re: Tyrone, Why can a by Guest

Submitted by Guest on Sun, 2009/06/21 - 19:46.

So let me get this straight. There are franchisors that collect monthly gross sales ON THE HONOR SYSTEM??!!! (Think about it Tyrone, you guys just lied to the zee and you expect him to now just tell you the truth what he owes you?) If there are franchisors that do this it is a negligible percentage of the total franchisor universe. Almost all require tying into a central database so the franchisor can see most every sale. You really think franchisees are that stupid? (Well, given the fact that we all fell for the B.S. to buy these damn things I guess you are justified.) The only way for a franchisor to maintain leverage over the franchisee is to be hooked into the business computer. Stop the nonsense. Yes, SOX is expensive. We are not talking SOX. We are talking a basic computer software program. Since almost all of you are already tied into the zee's computer it will be a minor adjustment. It doesn't even have to be written into the zee program. The program will analyze the zor's accounting dept's numbers - again, line A goes to file B. Stop the nonsense. By the way. My franchisor already breaks it down by first year franchisees. Several years ago they stupidly published the numbers for almost a year. Then, when they realized they were showing how low the first year numbers were the first year numbers just magically disappeared. Yet, apparently prior to senior management realizing this information was being diseminated they not only showed that year, they also compared that full year to the previous full year's brand new first year franchisee's numbers. Remarkable how BOTH year's real numbers came in at HALF of what appeared on my projections for the SBA loan. Please, intelligent responses from now on. You make this out to be difficult because franchisors don't want the info out there. Again, it would limit the truly good franchise investments to just a few. For franchisors to be fighting this hard on easily attainable, readily available numbers shows how scared they are of the information getting out.

Okay Brilliant One... by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 19:55.

Yes, we are all afraid of the secret getting out. I guess the jig is up! You have found us all out. It was so easy to keep all this a secret until you came along. What will we do now. You must send your findings to the FTC so they can have an emergency rule making session to correct this conspiracy by franchisors to keep FPRs from prospective franchisees. I am suer it will come as a surprise to the FTC and they will make amends post-haste. You may want to also reveal your findings to the various States that regulate franchising too, they may be even more astonished.

Financial representations no secret by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 20:09.

There is no secret to be let out. As discussed by Robert Tingler (above) , this discussion has been going on for 20 years. And the FTC did solicit comments on this matter prior to the most recent revision of the Franchise Rule.

The debate over financial representations made to franchisees is as complex as it is longstanding.

But the narrower issue raised by the Sniegnowski article is how to deal with bogus pro formas submitted in connection with government-guaranteed loans. The problem is that accurate pro formas would likely result in fewer loans being made, which is not what franchisee purchasers nor what the franchise industry wants.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

What is so special about bogus numbers getting into government by RichardSolomon

Submitted by RichardSolomon on Sun, 2009/06/21 - 20:24.

guaranteed loan apps? Using bogus financial information to sell the franchise in the first place is worse than the information finding its way into the loan app.

That is because the ignorant franchise investor is led to believe that what he sees is a representation of the business model he is buying - its performance potential. When that turns out to be false and the investor runs out of working capital, he loses everything. The government just passes it on to taxpayers - maybe a few pennies each for the total loss.

What requires priority consideration is not putting bogus financials from the franchisor into the loan app. It is the making of the false financial presentation in the first place.

That the franchisor may not have made the representations directly to the investor (and that is laughably improbable, no matter the FDD and contract language), but the transaction in which the investor assumes the risk is facilitated by the false information - same end result - investor loses everything.

Why then focus on the loan app situation? There are anti fraud statutes prohibiting both. Their not being enforced confers a license to misrepresent. Is that rocket science?

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Funding Solutions LLC is a good example by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 20:54.

Solomon writes: What is so special about bogus numbers getting into government guaranteed loan apps? Using bogus financial information to sell the franchise in the first place is worse than the information finding its way into the loan app.

Umm... lying to the feds can land you in the cell next to Martha Stewart.
When the government loses money as a result of fraud, it has a $25B budget and 100,000 employees at DoJ to go after the bad guys.
Assuming arguendo that the zee is lied to, this may or may not give the zee a legal cause of action. Even if the zee can survive a motion to non-suit, the zee needs to come up with $$ in the first place and more to pursue the case.
While violations of the Franchise Rule (including Item 19 violations) are theoretically punishable, they don't give rise to a private right of action. And the FTC has not exactly been a ball of fire when it comes to enforcing the Franchise Rule.

Fraud in the loan application process is likely much easier to prove and to prosecute than the representations made to the franchisees. Moreover, if loan brokers are held to account for their representations, it will have a prophylactic effect.

For example, if the Benefields go after Cuppy's it will affect the behavior of one (now defunct) franchisor. But if it is true (as the Benefields are claiming) that Funding Solutions LLC submitted numbers having no basis in reality, then the Benefields' and/or SBA Inspector General's seeking recourse against Funding Solutions and the banks involved will cause other lenders and banks to take notice.

To that extent, targeting pro forma abuse is a more efficient means of dealing with the broader problem.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Re: Funding Solutions LLC is a good example by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 21:04.

While abhor all things Cuppy and those miscreants that helped them sell and finance franchises. I am not so sure that the Benefields will be quick to claim that Funding Solutions submitted a business plan without their knowledge or signature affirming the numbers were theirs. Unless of course Funding Solutions was stupid enough to go out so far on that limb? My guess is the Benefields will become mute to the SBA.

Ricky Benefield ain't no fool by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 21:23.

TMalcom wrote: My guess is the Benefields will become mute to the SBA.

Ricky may be handy with a toolkit, but I hear Alicia Benefield has drawn the line at Ricky's proposal to build a tree house in the village square in the event of home foreclosure. So they are indeed speaking with the Inspector General, and properly so.

It is important to remember that these pro forma numbers which form the basis for the underwriting decision are not supposed to be shown to the franchisees. In fact, they are provided to the loan broker on condition that they only be used in the loan submission and not shown to the franchisee.

Here, the allegation is not only that the numbers used by Funding Solutions LLC did not have a basis in reality, but that Funding Solutions LLC then prepared a business plan for the franchisees and charged them $5,000 for it. The logical assumption is that Funding Solutions used the same fanciful numbers for the pro forma and then for the $5,000 business plan.

However, I stress that my analysis is based on what has been publicly reported and the Benefields would have to discuss the details. My understanding is that the Benefields and Ms. Legaspi are being more reticent in public statements, which may indicate their being reined in by legal counsel in preparation for a suit.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Re: Ricky Benefield ain't no fool by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 21:33.

Again, I abhor all things Cuppyesque, however it is not clear to me that the numbers in the franchisee's business plan are not in question here even though the franchisor may have provided supporting numbers to the lender or loan originator. I cannot imagine, but I am willing to keep an open mind, that an underwriter could ignore a glaring difference between the franchisee's business plan and statistical information supplied by the franchisor?

Mr. Solomon, If a bank wants by Guest

Submitted by Guest on Sun, 2009/06/21 - 20:41.

Mr. Solomon, If a bank wants to accept fraudulent numbers to write a loan for their own portfolio that is one thing. They have a right to take the risk on behalf of their shareholders. They can choose when and where to accept the risk. HOWEVER, they are not accepting the risk - only the reward. You know as well as I do that you can not fraudulently induce the government into a loss. The SBA has passed on its responsibility for loan review to the banks. The SBA did NOT give the banks the right to just accept anything on the projections. There is a fiduciary duty involved by the banks - especially when the risk taker is another party (US GOVT). Yes, lying to the franchisee is (at least I believe) fraud. BUT by also getting the government to be on the hook for the loss is an additional - significantly additional - problem. They were able to offset the losses in the past by foreclosing on people's homes (the collateral). This can no longer be done (at least no where near as often) due to the current real estate crisis. The SBA is going to be putting up higher loan losses in the near future.

A lender's duty to a borrower is not fiduciary. The bank's duty by RichardSolomon

Submitted by RichardSolomon on Sun, 2009/06/21 - 20:49.

to the government is not fiduciary.

There are already prohibitory statutes on the books, There are already, under those statutes and under the common law, private rights of action for violating the anti fraud obligations - subject to serious dilution because of arbitration clauses in franchise agreements. Since the bank or SBA doesn't go after the failed frqanchisee in most instances, the arbitrators and many judges think of that as a winfall for the franchisee, not another aspect of the unfolded tragedy.

Your umbrage is impotent rage because what is already on the books is circumvented. Passing redundant laws won't improve that situation one bit. Requiring that there be financial information in Item 19 won't prevent that Item 19 information from being false information. False information in Item 19 is already prohibited.

The more it changes, the more it stays the same. It is all almost as cynical as I am.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Mr. Solomon, I am not an by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:00.

Mr. Solomon, I am not an attorney and therefore am somewhat at a disavantage in this discussion. However, when the SBA passed on the loan making duties to the banks, they, in turn, required the banks to do more than just turn a blind eye. The SBA can, and has, stopped payment on the guarantee to banks that wrote loans that did not meet SBA standards. They require that an analysis be performed on the "reasonability" of the projections as well as other stipulations. Therefore, there seems to be some sort of fiduciary responsibility or else the SBA could never refuse payment (unless I am using the wrong word and "fiduciary" is incorrect). As for the SBA not going after the franchisees - where the hell did that come from? Do you want the list of my fellow franchisees whose homes have recently been foreclosed on or having liens placed on them? The SBA most certainly goes after the collateral and has done so to limit their losses. Maybe you have been able to beat them down for your clients but I can assure you that they are taking aim at the homes of my fellow zees.

Re: Financial representations no secret by Guest

Submitted by Guest on Sun, 2009/06/21 - 20:19.

Correct about the article's issues. Wrong about what franchisees want. If franchisees realized that their hundreds of thousands of investment dollars had an 80% chance of LOSING $100,000+ in the first year of business, probably a similar loss in the second year and result in (hopefully) an income of about $30-$60,000 per year for 10 years (indentured servitude - you could get a government job, guaranteed with great benefits for the same income and no investment risk) do you really think they would do this farce? As far as this discussion going on for 20 years. How many people understood the magnitude (especially people in the SBA) of the inflation of revenues? The SBA is being fraudulently induced to guarantee a loan due to these grossly inflated numbers. Before, they could look the other way because the collateral (the homes) were rising in value. No longer the case. We have all witnessed a substantial number of franchises closing in the last year. What hasn't come out yet - due to the length of time it takes to workout these loans, is the significantly higher loan losses they will encounter because the homes are now underwater.

ProForma issue is not same as earnings representation issue by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 20:33.

Several distinct issues.

Many first-time purchasers of franchises fall in love with a franchise and are determined to buy no matter what. Come Monday morning, the FedEx truck will arrive at Quizno's and Dunkin and UPS Store headquarters with dozens of checks from people who read sites such as BMM and who were cautioned by their lawyers and CPAs; they buy anyway.
People tend to be risk-averse. Many business startups --franchise purchases in particular-- take place because the buyer got laid off and cannot find another job--civil service or otherwise.
The discussion going on for 20 years relates to financial performance representations (formerly known as earnings claims)--the "cocktail napkin" has become part of franchise lore, but bogus pro formas are a different story.
The matter of bogus pro formas in the SBA loan process has been kept under wraps. I know of very few people who have even discussed the subject, and I know of no litigation on the matter.
I agree with you that much of the problem has not come to light because of rising asset values, and as such we are likely to see more discussion of this problem in years to come. I said as much when Sniegnowski interviewed me.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

To me there is no functional difference between false pro forma by RichardSolomon

Submitted by RichardSolomon on Sun, 2009/06/21 - 20:52.

information being provided and fale earnings claims. It is the same thing - false financial representations in aid of a plan to sell franchises.

Hair splitting definitional issues don't elucidate the issue - in my less than humble opinion.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Mr. Steinberg, "Many by Guest

Submitted by Guest on Sun, 2009/06/21 - 20:50.

Mr. Steinberg, "Many first-time purchasers of franchises fall in love with a franchise and are determined to buy no matter what." Really? Based on what? We all agree it is impossible to get to the real earnings numbers given how franchisors report the information. Right now the purchaser is still seeing "the cocktail napkin" and hearing all the wonderful earnings their targeted system. Do you really think that a new buyer, when informed that "By the way, don't expect to earn any money in the first and probably second year. Actually, expect to lose possibly another hundred thousand, over and above your home expenses, during that time." Do you really believe that this buyer will now jump in with both feet? Again, if the real numbers were posted, the number of franchise systems out there would be cut down significantly. As for some of your other comments, I would love to talk with you for 10 minutes tomorrow.

One example by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 21:00.

Q: Based on what?

My favorite example is from back in the day when Richard Sauls ran the QuiznosSucks.com website. If you ever saw that, it was a doozy. First website I ever saw that had streaming video and he also posted hyperlinks to news articles and pdf copies of the threatening letters he got from Quiznos' legal counsel.
An attorney in the Midwest had a client thinking of buying a Quizno's. I suggested he look at the website. He was stunned. He showed his client the website. The client didn't care, and bought the franchise.

There is only so much you can do to protect people from their own delusions.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Re: Okay Brilliant One... by Guest

Submitted by Guest on Sun, 2009/06/21 - 20:06.

If you can't intelligently argue the point then make fun of it. Good strategy. By the way, the SBA did their own study that concluded that SBA franchise loans fail at the same rate, if not higher, than SBA non franchise loans. They attempted to mandate that any and all references made on their site that franchising is a safer way to go was to be removed. The initial story above was about gross revenue numbers. Aside from what was mentioned about the doubling of my zors gross revenues, why not look at the Cuppy's numbers stated in the story. A net operating profit of $170,000+ for a first year franchise, yet the whole company is failing. How can that be Tyrone? How can franchisees see a net operating profit of that size and yet be part of a failing franchise. This story is about the falsification of revenues. I love it when you guys go to trying to belittle the messenger when you can't justify your arguments.

Re: Re: Okay Brilliant One... by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 20:18.

If you want to talk about the abuses at Cuppy's or poor quality franchises, fine I'm with you! You, however are painting with broad brush to paint all franchisors the same color. There are thousands of franchise concepts a person can choose to business with and the are most certainly vary from concept-to-concept and industry-to-industry. If people chose to invest in serious due diligence and focus on concepts that have proven past, bright future and an FPR in the franchisor's FDD they may be better off.

Tyrone, Thank you. Yes, I by Guest

Submitted by Guest on Sun, 2009/06/21 - 20:33.

Tyrone, Thank you. Yes, I agree we are talking about poor quality franchises. A little background: According to BlueMauMau, my franchise has a loan failure rate of "x". The only way I was approved for my SBA loan was due to the loan consultant's (referred to by my zor) doubling gross revenues. Without it, I don't get approved. Now, here it goes. There are over 200 franchise systems whose loan failure rates on BMM's site are HIGHER than mine. To give you more specifics, the SBA has confirmed to me that the actual loan failure rate for my franchise is 30% HIGHER than what BMM has on their site. Franchises don't fail at that rate unless there is something wrong with the system. To have over 200 other systems failing at an even higher rate shows you how systemic this problem is. These loans don't fail because the franchisee is profitable. They fail because the zee ran out of money. The gross revenues are not there. They never were. Yet, those inflated numbers were needed on the projections to get the loan approved. And again, thank you for getting to the point. There are bad franchise systems out there and they proliferate because these inflated numbers have been tolerated for so long.

Re: Tyrone, Thank you. Yes, I by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 20:54.

Failure rates for SBA loans do not accurately represent the failure of a particular franchise system, while they are an indicator, not all franchisees use SBA guaranteed loans to open their businesses. The Coleman Report is questionable source of data for SBA loans success and failure. Additionally, in fact, many large multi-unit and multi-concept franchisees do not use or qualify for SBA loans. Finally, preferred lenders who have pushed fraudulent loans through their underwriting and the loan goes bad the SBA doesn't have to cover the lender's loss.

Tyrone, Again, thanks for by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:04.

Tyrone, Again, thanks for that response. Could you please provide more details on this Coleman report? Is that the one from Tim Bates in 1996?

Shane, Bates, & Purvin by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 21:43.

Michael Webster has been kind enough to post a copy of our article on one of his websites. We discuss some of the longitudinal studies from the 1990's in the section titled "Franchise Success/Failure Rates"

Since the article was completed in 2003 and published in '04, some of the data may be old. But for various reasons discussed previously on BMM, my gut is that the current decade will turn out to have an even higher rate of failure for franchisors.

This does not mean that purchase of a franchise is foolish. But history does suggest that you consider purchasing from a franchisor which has a track record of operating units--especially if you are new to the particular industry.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Re: Tyrone, Again, thanks for by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 21:16.

1995 Bates report was sloppy and poorly done. The Colman Report is much better but is still lacking since it requires proper coding to correlate the loans with particular franchises which doesn't always happen unless the franchisor keeps records and then takes corrective steps to reconcile the data. You can buy the report at www.colemanpublishing.com/public/387.cfm

Ever heard of the "Search" box? by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 21:10.

Lazy Guest wrote: Could you please provide more details on this Coleman report? Is that the one from Tim Bates in 1996?

Not to be rude, but the Myopic Fishy One has given you a "Search" box in the top right corner of the BMM website.

Type in "Coleman Report"-- start with this previous article on BMM in which Mr. Coleman is interviewed by BMM.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Re: Ever heard of the "Search" box? by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 21:19.

That works too!

Re: Ever heard of the "Search" box? by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:19.

My apologies to everyone - I am new to this site and did not look for the Search box HOWEVER, Mr. Steinberg, Tyrone and anyone else. I am talking about an internal report by the SBA published in 2002 and backed up by another internal report within the SBA. This is NOT the Tim Bates report but another one (again, published in 2002) and kept inhouse that shows that SBA franchise loans fail at the same rate, IF NOT HIGHER, than SBA non-franchise loans. It floored them when they essentially verified Tim Bates' study that many franchisors tried to debunk. I am not talking about some journalist who may or may not be totally truthful (I honestly know nothing about the guy). This was researched and written by INTERNAL SBA officials.

Suggestion for newbies by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 21:28.

Guest wrote: My apologies to everyone - I am new to this site and did not look for the Search box

Welcome aboard. You should register (you can use your name or a pseudonym) in order to use the full range of features on the site, including email to other registered users.

Plus, if you drop an email to Mr. MauMau he will add a WYSIWYG box so you can put hyperlinks and formatting in your comment postings. Being less nerdy than Mr. MauMau, I find the WYSIWYG box to be very helpful.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Mr. Steinberg - Welcome Aboard by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:42.

Thanks for welcoming me aboard. Interested if you ever knew of the internal SBA report

Re: Re: Ever heard of the "Search" box? by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 21:22.

Guest - "This was researched and written by INTERNAL SBA officials." Please point us to this SBA report. Or do we need a FOIA suit to get it?

Re: Re: Re: Ever heard of the "Search" box? by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:37.

Here is little taste: Findings: Despite the popular view that franchisees are more successful than non-franchisees, SBA's experience with defaulted loans does not support this. For example, the loans identified by SBA as franchise loans that originated from FY 1991 through FY 2000 actually performed slightly worse than non-franchise loans. Some other nice little tidbits. Findings were again confirmed by another division within SBA.

Re: Re: Re: Re: Ever heard of the "Search" box? by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:44.

Meaningless! What is the source? Is it testimony, someone's opinion or is it an actual empirical study?

Re: Re: Re: Re: Re: Ever heard of the "Search" box? by Guest

Submitted by Guest on Sun, 2009/06/21 - 21:49.

Sorry pal, researched and written by the SBA's Office of Inspector General published in 2002 and verified by another study conducted by another division within the SBA. Have fun!

Re: Re: Re: Re: Re: Re: Ever heard of the "Search" box? by Tyrone Malcom III

Submitted by Tyrone Malcom III on Sun, 2009/06/21 - 21:57.

Sure enough PALLY, you got bupkis! Now go play in traffic.

Logic Flaw by Paul Steinberg

Submitted by Paul Steinberg on Sun, 2009/06/21 - 20:15.

Guest writes: A net operating profit of $170,000+ for a first year franchise, yet the whole company is failing. How can that be Tyrone? How can franchisees see a net operating profit of that size and yet be part of a failing franchise.

Not to sound like a broken record, but:

The zor profitability and the zee profitability are 2 entirely different matters. Conflate the two at your own peril.

BTW: In the specific case of Cuppy's, I doubt the average franchisee was breaking even. However, it is entirely possible that the unit economics can make sense but the corporate franchisor still loses money due to a bloated cost structure or other reasons.

Paul Steinberg
Franchisee Attorney, New York City, Ph: 212-529-5400

Paul Steinberg, Franchisee Attorney, New York City, Ph: 212-529-5400

Paul, and what is happening by Guest

Submitted by Guest on Sun, 2009/06/21 - 20:22.

Paul, and what is happening to Cuppy's corporate? Are the problems related to a bloated cost structure or that the franchisees were not coming anywhere near the "expected" numbers?

The Real Point behind the SBA Loans & Loan Packaging Industry by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 11:13.

The attorney commentators, including Paul Steinberg, Richard Solomon and even Robert Tingler have, I believe, missed the potential for this scandal to radically change the franchise world.

My conclusion is that continued reliance upon SBA for financing will ultimately push those franchise systems into a full blown past finanical performance disclosure, predictions will be left up to individuals and their advisors.

This would be a radical change in the franchise world, because as Tingler has pointed out, there has been over 20 years of fruitless discussion at the regulator level on this issue.

However, this time may be different - somebody might very well end up in jail for helping prepare the equivalent of a "liar loan". Liar loans helped a number of people purchase homes without any evidence of income or finanical resources.

Liar loans in the sub prime mortgage industry are the functional equivalent of franchise loans based on knowingly false pro formas, predictions that were known to be based on false claims of past performance.

People are going to jail for participating in subprime mortgage schemes which used liar loans - what makes people think that loan preparers who lied to the SBA are going to be immune from criminal prosecution? Because it hasn't happened before in the past?

When some loan preparers go to jail, or maybe even the franchisors who provided them with the bogus predictions are turned in, there will be massive fear within the franchisor community, the practice of liar loans is as pervasive as some of the commentators suggest.

The natural solution, which can only evolve out of group fear, is for a large group of franchisors to create standards for item 19 disclosure and have those standards recognized and bless by the regulators. What process that might take is hard to know.

How many franchisors go to jail before this happens is anyone's guess. But, I don't see the FBI stopping with subprime liar loans, when the franchise world will provide easy picking for them.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

What about those that didn't get loans? by jd

Submitted by jd on Mon, 2009/06/22 - 14:42.

Michael or Paul, there were stories out there of people who gave Cuppy's the $40k refundable deposit that were said to be contingent on them getting financing. Some of these people stated that they didn't get financing and were asking for their money back. What was done differently in those cases that caused them to get denied? Did they not go through Funding Solutions? Did the lender actually deny them because their business plan looked too 'inflated'?

Refundable Deposits by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 15:32.

jd asks: "Michael or Paul, there were stories out there of people who gave Cuppy's the $40k refundable deposit that were said to be contingent on them getting financing. Some of these people stated that they didn't get financing and were asking for their money back."

This is a bit of speculation on my part, but I would guess that Morgan found it more profitable to do build outs rather than just scoop deposits.

You raise an interesting point, however. Worth looking into more deeply. But I would guess, at this point, that those who lost their deposit were largely rejected by the banks - be interesting to know what Funding Solution's success rate was, eh?

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

The Real Point by oldsword

Submitted by oldsword on Mon, 2009/06/22 - 14:20.

Michael, First off, I am the original poster who wrote the very first blog comments (and many subsequent comments) under the name "Guest" regarding the systemic falsification of SBA loan projections. The real point is that the SBA is now going to be left holding the bag. Not only has there been an increase in the total number of loans for franchising, the average amount per loan on a SBA franchise loan is also HIGHER than the amount on a SBA non-franchise loan (this disparity has increased from a 1% difference in 1991, with franchise loans larger, to, in 2000, a 40% difference with franchise loans being larger) as concluded by an internal SBA study performed in 2002. The study also stated this below: "Despite the notion of franchise success, OIG audits and investigations have identified potential origination problems in some purchased loans identified by SBA as franchise loans. Moreover, a previously mentioned SBA-funded study found that a franchisor must reach a minimum efficient scale to lower its (as opposed to a franchisee's) costs. Given this necessity plus the need to collect franchisee-paid fees, franchisors have an incentive to encourage as many prospective entrepreneurs as possible to become franchisees and find financing. Moreover, there is always a risk of some franchisor's overly optimistic financial projections enabling underqualified prospective franchisees to obtain - and default on - SBA guaranteed loans." Without a robust housing market the SBA is doomed in collecting on the loan's collateral. Therefore, given the number of failed franchisees - that, mind you, have always been high - the SBA's loan losses will now start mounting and become a much more noticeable black eye for the franchising world.

SBA Losses by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 14:36.

Old Sword writes: "The real point is that the SBA is now going to be left holding the bag. Not only has there been an increase in the total number of loans for franchising, the average amount per loan on a SBA franchise loan is also HIGHER than the amount on a SBA non-franchise loan."

I think that you are probably right about this, but the SBA is not going to go quietly into the night in this era of advanced fraud sensitivity. They will have to have a scapegoat to send to jail to show that they were duped - otherwise many SBA officials will be looking for a new job. This is simply not a good time to commit or be found to be committing white collar fraud.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

I never miss an opportunity to be aggressive - I am not by RichardSolomon

Submitted by RichardSolomon on Mon, 2009/06/22 - 12:40.

aggressive in this instance because I don't believe this SBA frachise loan situation is more than a matter of silent and small flatulence in a high wind.

Unlike home morgage liar loans, there is not a situation in which the SBA loans to small business franchise investors represent a sufficient mass of securitized loans to affect the ecomony and become a focus of things like credit default swaps. SBA loans to franchisees will never amount to a sufficient mass to be picket up on Congressional radar.

The economy will not be adversely affected by SBA franchisee loans - at least not the economy at large. Franchisees will continue to lose everything in unvetted/incompetently vetted investments, but we all already know that no one cares about that. If the government was interested in protecting FranWads, that would already have happened. With no "envelope" full of money with which to buy legislative protection, fleeced franchisees are an orphan group.

If God did not intend that there be fleecing, She would not have created sheep!

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Total SBA Loan Volume by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 13:00.

Richard writes: "SBA loans to franchisees will never amount to a sufficient mass to be picket up on Congressional radar."

Here is the total SBA loan volume for 2007. I think that you are wrong.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

The Scandalous History of the SBA by Les Stewart

Submitted by Les Stewart on Mon, 2009/06/22 - 14:57.

Michael appears to be on the side of history on this potential controversy. see An Historical Perspective on The Small Business Administration [Adapted from Jonathan J. Bean, Big Government and Affirmative Action: The Scandalous History of the Small Business Administration (University Press of Kentucky, 2001)

Overview To be blunt: The SBA is in the discrimination business. It takes wealth from taxpayers and awards loans and contracts to small and minority business owners–groups never adequately defined, by the agency’s own admission. By awarding loans and government contracts to a select group of firms, the agency gives them a competitive advantage over other companies.

The Canada Small Business Franchising program is an equivalent program. I reported to Industry Canada on my findings in 2005 (see Franchising Opportunism). The United Kingdom's very aptly named Small Firms Loan Guarantee Scheme seems ripe for such abuse as well. The loan pushing cycle described in my paper has been confirmed several times by independent U.S. sources. Those wishing to play in the current Cuppy "VengeFest" might be wise to read and appreciate the inadvertent allies of Dale the Doofus.

My inquires into government guaranteed loan programs, indicate they make for very strange fraud bedfellows.

Les Stewart MBA FranchiseFool :: WikidFranchise.org

SBA Scandal by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 15:38.

Les quotes :"The SBA is in the discrimination business. It takes wealth from taxpayers and awards loans and contracts to small and minority business owners–groups never adequately defined, by the agency’s own admission. By awarding loans and government contracts to a select group of firms, the agency gives them a competitive advantage over other companies."

This is true, but if the SBA was better than the market in making risk adjusted lending there would be no problem.

The problem now is that the SBA program is now dominated by lenders who no longer care about any real business value. They are happy to take the franchisor at their word, in order to increase volume flow. This is how Fanny Mae ended their useful contribution to an increase in the national housing stock.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Them aint all loans to franchisees. And since when did my being by RichardSolomon

Submitted by RichardSolomon on Mon, 2009/06/22 - 14:23.

wrong stop me from having an opinion?

Sometimes in error, but never in doubt.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Never in Doubt by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 14:39.

Richard, they are not all loans to franchisees. However, we are looking at very large loan portfolio, even if only 25% are loans to franchisees.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Canadian SME Loan information by Les Stewart

Submitted by Les Stewart on Mon, 2009/06/22 - 15:47.

Michael.Richard, From 1999 to 2007, franchised loans represented 19.7% of total loan $. Those loan $, however, resulted in 25.9% of all claims against the pool. This +31% "risk premium" is just one in a series of red flags that indicate "predatory franchise lending" .

Many of these liar loans are never ever registered with the "feds". The banks effectively "self-insure" within their own franchise banking group. The "fraud margin" (Grotesquely over-inflated appraisals loan proceeds MINUS Used equipment with serial numbers filed off) more than covers everyone's take. This is how franchising becomes the "most lucrative form of commercial lending": a good thing from the bankers' perspective. Doofus Dale is the visible stooge in a little industry play designed to Cool out the Marks [fraud victims] who are now being followed here on BMM.

Dale wears asbestos underwear. He's fireproof not because of his good looks but because if he falls, a whole lot of much more powerful dominoes fall as well. This is why getting legal representation is so, like, impossible. Tip of the hat to Michael and Richard: covered in: How can banks get away with repeatedly and knowingly lending into crapola franchises? . -- Canada Small Business Financing program, Annual Reports, Industry Canada Les Stewart MBA FranchiseFool :: WikidFranchise.org

Les Stewart MBA FranchiseFool :: WikidFranchise.org

Re: The Real Point behind the SBA Loans & Loan Packaging Industr by Guest

Submitted by Guest on Mon, 2009/06/22 - 12:21.

Are lender underwriters looking at two different sets of numbers in the case of Cuppy's one being the franchisee's business plan and the other confidential representations to lenders? I think lenders are sometimes looking at both, but always looking at franchisee business plans. The franchisee's business plan should be prepared by them even if the loan broker/franchisor assists them. Does the franchisor assistance rise to an illegal FPR (earnings claim)? If the franchisor helps after a franchise agreement has been signed is it still inappropriate to give greater help? How do brokers fit in this mess? Are brokers proxies for franchisors so they can make improper FPRs?

Confidential Representations by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 13:02.

Guest asks: "Are lender underwriters looking at two different sets of numbers in the case of Cuppy's one being the franchisee's business plan and the other confidential representations to lenders?"

There are no "confidential representations" to lenders from the franchisor because the underwriter is the agent of the franchisee. Franchisors who give "confidential information" to the underwrite to show lenders are engaging in illegal item 19 disclosures if there is any difference between their item 19 disclosure and what they tell the underwriter.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

Re: Confidential Representations by Guest

Submitted by Guest on Mon, 2009/06/22 - 13:24.

Yes, numbers given to lenders/underwriters are by definition different than those in Item 19s. Especially, if the Item 19 is based on unit gross sales in various formats and the numbers given to lenders/underwriters while based on the same unit gross sales numbers have fleshed out P&L metrics.

Item 19 Gross versus P&L by michael webster

Submitted by michael webster on Mon, 2009/06/22 - 14:41.

Guest writes: "Yes, numbers given to lenders/underwriters are by definition different than those in Item 19s."

This is going to be a very large problem for some franchisors and underwriters who are systemically engaged in deceiving the SBA.

Michael Webster, a franchisee attorney in Toronto, Ontario, publishes a website on business opportunities and franchises called "The BizOp News"

So what are Zees using? by Granville_Bean

Submitted by Granville_Bean on Sun, 2009/06/21 - 21:35.

Okay, so the prospective Zee isn't seeing the pro forma that the bank is using to approve their SBA loan. (Don't get me started on SBA loans; in addition to being against my general philosphy, they are a way to play a shell game with the real risk and do deals that shouldn't be done - we are multi-unit Zees and have never had nor even applied for an SBA loan.) So WHAT ARE THE ZEES USING for THEIR OWN business plans and projections? Surely not a wing & a prayer, throw it at the wall and see what sticks? Admittedly we bought most of our units as resales. However, we HAVE opened a new unit. With every one of them (even the new one) the projected P&L was the PRIMARY BASIS FOR NEGOTIATION. Okay so this is just anecdote, but for the new unit everyone was on board with the gross revenue projection. What we disagreed on was expenses. (We turned out to be right.) So I ask again, WTF are prospective Zees using as their projected P&L, since we know they aren't getting the one the bank got???

Re: So what are Zees using? by Guest

Submitted by Guest on Mon, 2009/06/22 - 06:49.

Mine sure didn't show $180K positive cash in the first year! GB, keep in mind, it's hard to make good business decisions when you're constantly being lied to. Crap into a business plan equals crap out.

More Fraud? by Guest

Submitted by Guest on Sun, 2009/06/21 - 18:31.

How many franchisees are told by the franichisor or broker not to tell the bank that you're quitting your job to run the business? The loan has two full-time incomes, plus store revenue, in the financials. Does the bank really think any franchise will run without full-time oversight by an owner, at least initially?

Re: Franchisees Kept Out of Earnings Forecasts for Their Own Loa by Guest

Submitted by Guest on Sat, 2009/06/20 - 15:01.

Apparently, the SBA is happy to lend to franchisees of franchisors who make no earnings claims and who disclose no unit financial performance statistics of the units to new buyers because this is good for the banks and the lenders who sell the 90% SBA guarantees in the secondary markets. The SBA bends to this pressure of the special interests. Those "swimming naked" when the tide goes out still don't have a voice with the powers that be who apparently don't care about the losses of the franchisees as much as they care about the profits of the banks. Didn't someone from FranData who manages the SBA Franchise Registry for the SBA indicate that the SBA didn't do a good job of separating out franchise loans from independent small business loans and that the SBA software programs didn't do a good job of picking up on franchise loan defaults?

Carol Cross Emerges by Guest

Submitted by Guest on Sat, 2009/06/20 - 15:14.

Hi Carol! Spewing more crap I see.

Bad memories by Darnelle White

Submitted by Darnelle White on Sat, 2009/06/20 - 15:20.

I don't think so. The post is way too short for Carol Cross. There's also no mention of SBA express loans or government regulation. I suspect it's just bad memories playing tricks on you.

Quintessentially Carol Cross by Guest

Submitted by Guest on Sat, 2009/06/20 - 15:20.

Without a doubt it is Carol!

yep by Elvisfan

Submitted by Elvisfan on Sat, 2009/06/20 - 15:25.

Yep it sure sounds like Carol! Maybe she is back because her protege was taking some knocks.

Is This Subject Matter Too Difficult For Zees To Grasp? by Guest

Submitted by Guest on Thu, 2009/06/18 - 17:12.

This is the most important topic ever to be discussed on these pages and yet there are no comments. Zees that have taken on a SBA loan need to understand that, in most cases, YOU NEVER QUALIFIED FOR THE LOAN. Most of you, as you head into closing or bankruptcy, blame the lack of marketing or the lack of help from your franchisor. What you don't understand is that you were never expected to be profitable in the first place. I am the zee from the 300 unit franchise that commented in this story. I was lucky to find the actual statement by my franchisor regarding the average first year gross revenue numbers (in writing). Again, a gross revenue number that is half the number of what is placed on our loan projections and half of what is REQUIRED to hit the SBA debt coverage ratio (the higher gross numbers, after subtracting the monthly expenses, brings the net profit up to the required ratio). For most zees, I am talking over your head. I know, I tried to get my fellow zees to work with me - they didn't understand numbers or how it affected them. Only now, after significant closings and more to come, are they realizing what I was saying all along. What is worse, is that there are over 200 franchise systems whose SBA loan failure rates are HIGHER than my system. I have spoken with other zees from other systems and this is happening all over. Get one thing straight: YOU NEVER QUALIFIED FOR YOUR LOAN. It was only after using FRAUDULENT first, second and third year projections that you were given the SBA loan. The banks, according to the SBA's own Standard Operating Procedures are required to perform an analysis on the "reasonability" of the projections. That is not to say that they analyze the projections to see if they reasonably cover the required ratios. It means they are supposed to determine if those very projections are "reasonable" (you attorneys should read it for yourself). Given that the average first year gross revenues of my franchise (again, verified and published by my own franshisee AFTER I signed on) are HALF of what was given to me by my loan consultant, I think we can "reasonably" conclude that no true analysis was performed. BUT, the SBA guaranteed the loan so the bank doesn't care and, over the years, the SBA would just take the home of the zee and other assets to offset their losses. There is more to this story that will eventually come out.

200 Franchise Systems with higher loan failure rates by Mr. Blue MauMau

Submitted by Mr. Blue MauMau on Thu, 2009/06/18 - 18:40.

"What is worse, is that there are over 200 franchise systems whose SBA loan failure rates are HIGHER than my system." - Guest

Just to be clear, the anonymous zee is talking about the list of some 500 franchise chains that are sorted by highest to lowest by franchisee failure rates to pay back SBA loans.

See 2008's SBA Loan Failure Rates by Franchise Brand (free of charge).

You know the old saying by Barbara Jorgensen

Submitted by Barbara Jorgensen on Thu, 2009/06/18 - 18:56.

"What you don't know will not hurt you." In this case what you don't know will destroy you financially. Again, what can zees do to protect themselves?

Re: Is This Subject Matter Too Difficult For Zees To Grasp? by Guest

Submitted by Guest on Thu, 2009/06/18 - 18:09.

I am waiting to hear what Funding Solutions has to say about this.

"You were never ever expected to be profitable" by Barbara Jorgensen

Submitted by Barbara Jorgensen on Thu, 2009/06/18 - 18:08.

This is absolutely obvious.

Guest I don't think many zees would understand.

Just seeing what happened with the real estate market I would say most people did not understand the bad loans that were offered them. Now look what a mess that caused our country.

I do believe zors that are starting out would qualify anyone to get started. There should be a way zees don't have to disclose how much money or assets they have. I do believe they should go by a credit check and not let the zor know everything. I don't know how to get around that. By telling the zor everything it is giving rogue zors how much they can rob you of.

Item 19 is written to cover their butts. I do not believe any zee would touch a franchise unless there were earning claims given.

If the zee never sees the truth that the zor, loan officer see's how can they protect themselves and what can a zee do?

Either way you turn, SBA loans or equity lines they get your house or your stuck paying for the equity line. If you have liquid cash you'll loose that too.

There is no way for the zee to win.

Is This Subject Too Difficult for Zees To Grasp by Guest

Submitted by Guest on Thu, 2009/06/18 - 19:52.

Barbara, I am the author of the first comment. You are missing something very crucial. YOUR ability to collateralize your loan is NOT one of the most important requirements of the SBA loan application process. If you read the SBA SOP's (Standard Operating Procedures) you will see that NOT having enough collateral is NOT grounds for rejecting your loan. Showing the ability to repay your loan through CASH FLOW is the requirement. Follow me on this. Your business plan has projections. Monthly sales and monthly expenses. The SBA requires that you show that your annual sales EXCEEDS your annual expenses by "x" amount. After paying ALL expenses - rent, salaries, insurance, utilities, etc., AND loan payment (except taxes I believe)your annual net number (sales minus expenses) MUST meet a minimum ratio set by the SBA and banks. All the loan consultant has to do is hike the sales number so high that regardless of what expenses the zee has the zee will show a net profit high enough to meet the SBA standards. In my case, had the consultant used the annual average sales number put up by the first year brand new zees in my system it would not have been high enough to get the loan. Had we increased the average number by 80% we would not have gotten the loan. My first year number on my projections were more than TWICE the actual average first year number. Only then did my projections meet the SBA requirements. Don't worry about the zees financial history. THE MOST IMPORTANT ASPECT OF A SBA LOAN APPLICATION IS THE PROJECTIONS. YOU DON'T MEET THEIR RATIOS, YOU DON'T GET THE LOAN. IF YOU DON'T HAVE THE COLLATERAL TO REPAY THE LOAN BUT YOUR PROJECTIONS SHOW YOU CAN REPAY THROUGH THE CASH FLOW OF THE BUSINESS YOU WILL GET THE LOAN. This is according to the SBA's SOP's.

Is This Subject Too Difficult for Zees To Grasp by Guest

Submitted by Guest on Thu, 2009/06/18 - 19:50.

Barbara, I am the author of the first comment. You are missing something very crucial. YOUR ability to collateralize your loan is NOT one of the most important requirements of the SBA loan application process. If you read the SBA SOP's (Standard Operating Procedures) you will see that NOT having enough collateral is NOT grounds for rejecting your loan. Showing the ability to repay your loan through CASH FLOW is the requirement. Follow me on this. Your business plan has projections. Monthly sales and monthly expenses. The SBA requires that you show that your monthly sales EXCEEDS your expenses by "x" amount. After paying ALL expenses - rent, salaries, insurance, utilities, AND loan payment(except taxes I believe)your annual net number (sales minus expenses) MUST meet a minimum ratio set by the SBA and banks. All the loan consultant has to do is hike the sales number so high that regardless of what expenses the zee has the zee will show a net profit high enough to meet the SBA standards. In my case, had the consultant used the annual average sales number put up by the first year brand new zees in my system it would not have been high enough to get the loan. Had we increased the average number by 80% we would not have gotten the loan. My first year number on my projections were more than TWICE the actual average first year number. Only then did my projections meet the SBA requirements. Don't worry about the zees financial history. THE MOST IMPORTANT ASPECT OF A SBA LOAN APPLICATION IS THE PROJECTIONS. YOU DON'T MEET THEIR RATIOS, YOU DON'T GET THE LOAN. IF YOU DON'T HAVE THE COLLATERAL TO REPAY THE LOAN BUT YOUR PROJECTIONS SHOW YOU CAN REPAY THROUGH THE CASH FLOW OF THE BUSINESS YOU WILL GET THE LOAN. This is according to the SBA's SOP's.

Anything projected by Barbara Jorgensen

Submitted by Barbara Jorgensen on Thu, 2009/06/18 - 20:36.

should not hold as fact. How can they get away with this? The banks should be held accountable too.

What your trying to get across by Barbara Jorgensen

Submitted by Barbara Jorgensen on Thu, 2009/06/18 - 20:22.

is most zees would not have qualified if the numbers were honest. Am I correct? In alot of SBA loans they make it work by showing the business will indeed be able to generate the cash flow to pay for it. (This is giving an earnings claim not to you but the banks.)

This is exactly what happened with real estate. The loan officers (unethical) made it work even if the numbers were not true.

Re: What your trying to get across by Guest

Submitted by Guest on Thu, 2009/06/18 - 20:37.

that is correct. To be a little more specific there are industry codes the banks look at. Essentially, franchises are lumped by industry - for example Cuppy's might be restaurants or food service (I don't know the specific categories). So the bank, to "research" the average annual sales number for a zor will look at the number associated with the industry category the zor is in. However, the categories are broad so a small coffee shop for example might be in the same category with Panera Bread (you tell me, you think their annual sales are the same?) Second, those codes, if I am correct (and I believe I am) are NOT first year sales but average sales for ALL the zees within the system - that skews the average sales number even higher. This enables the inflating of numbers, even though the numbers for your specific franchise system are well below the "industry code" number and thus, allows the consultant to "have fun" with the numbers. Yes, it is "only" lying to the bank (they don't care because the loan is guaranteed by the SBA) but it DOES promote lying to the federal government because the loan would never have been guaranteed by the SBA unless we "enticed" them to guarantee it thru the fraudulent numbers.

Holy Crap by Barbara Jorgensen

Submitted by Barbara Jorgensen on Thu, 2009/06/18 - 20:58.

Fraud is everywhere. This is the first I heard of this.

The cycle can go on and on. Victim after victim. Bankruptcy after bankruptcy. The taxpayers loose, zee loose but the zor keeps winning even if the zee goes out of business. The truth everyone looses but the rogue zor. They will just replace the zee with another zee.

The big guestion is why does the government not see this racket? I do not understand.

That isn't correct. The loans are guaranteed by the SBA for by RichardSolomon

Submitted by RichardSolomon on Thu, 2009/06/18 - 20:49.

political reasons. It wouldn't matter if you put "The Night Before Christmas" in your business plan.

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Political reasons? by Barbara Jorgensen

Submitted by Barbara Jorgensen on Thu, 2009/06/18 - 21:02.

IFA is very powerful in the political arena. Is that what you mean Richard?

HAHAHAHAHAHA!!! by RichardSolomon

Submitted by RichardSolomon on Thu, 2009/06/18 - 21:08.

Yea Octomom!

Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School

Franchisees Kept Out of Earnings Forecasts for Their Own Loans

"I discovered later that the lender didn't seem to care if the numbers reflected reality because as long as home prices were going up, the SBA could get their money back from closing on the homes of the borrowers."

209 Comments

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"Find out if there is a franchisee association (company sponsored or independent) and make a point of meeting the President or Board members"

"The mere fact that a franchisor would try to make a quick sale and not make a great effort to be sure the prospect understands exactly what they are getting into should be a red flag that causes a buyer to look elsewhere."

"None of the regulations and additional due diligence will insulate the franchise buyer from people who intend to mislead or defraud. "

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