How can banks get away with repeatedly and knowingly lending into crapola franchises?

It ain’t called a bank shot for nothing.

It’s as simple as Richard Solomon explains over at Blue MauMau.

First, Richard spells out the weasel play in an article named The Complicit Loan Broker In Franchise Fraud. [Whether there is a broker or not doesn't matter.]

It is common practice in franchising for a franchisor, especially a fairly new franchisor, to steer its franchise investors to a particular loan broker, and sometimes even to a particular bank. It is also fairly customary for the loan broker or bank to pay the franchisor for the “traffic”.

The information in the business plan always comes from the franchise sales/marketing people of the franchisor. The franchisee has little or no input in the whole matter other than to sign what is put before him by the loan broker without reading it or with scant attention being paid to it. The information is almost always false in the sense that it is full of exaggerations, to put it nicely, and the pro forma financial information has little or no basis in fact.

Richard goes through the details and asks rhetorically with knowing what the answer is:

What is the likelihood that a franchise investor, on these facts and with this testimony, will get a favorable verdict? Anyone care to guess? Since it may be a somewhat novel case, what is the likelihood that a favorable verdict will be upheld on appeal? Anyone care to guess?

And when Michael Webster asks a pertinent question:

How can the franchisor provided information to the loan broker, an agent of the franchisee, which amounts to an earnings claim when the franchisor disclaims making earnings claims in their Item 19?

Richard goes on to explain:

In the mind of the jailhouse lawyer crooked franchisor, providing information to help a franchise investor obtain a loan and complete a business plan (which it all total crapola anyway), is not considered (by them) to be the making of an earnings claim. In the weasel word play of franchising there is the FDD, and then there is everything else. The position that we weren’t defrauding the franchisee; if anything we gave the bank false information by providing it for the franchise investor’s business plan, is not just some cynical homorous thaing I made up. That’s how it really goes down.

It is useful to read the whole thread and then keep an eye on the posting.

Here’s a clip from one comment (named appropriately Hindsight) that has shown up:

How I wish I had read an article like this 12 months ago. This type of article should be covered on a major publication small business section.

Betcha wish you had read this article before signing up, eh?

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