Opportunity Knocks and Liars’ Loans: required reading to understand modern franchising

September 1, 2012

John Lorinc wrote the book on franchising from a franchisee’s investor viewpoint.

I’m glad to see it is still available to buy online and is in many Canadian libraries.

The hidden banking side is revealed in Chapter 4, The 90% Solution: Franchise Economics, some of which I excerpted in a WikidFranchise.org post.

What did the business press have to say about Lorinc’s work?:

  1. National PostOpportunity Knocks: The Truth about Canada’s Franchise Industry, is an impressively researched look at the myriad of franchises that mushroomed across the country in the past decade. An award-winning magazine journalist, Lorinc has produced an engaging account that charts both the spectacular successes of some franchisers and the utter failure of some franchisees. How franchises seduce those with the most to lose, Jennifer Lanthier, November 2, 1997
  2. Globe and Mail: At its worst, Lorinc says, franchising is a haven for the unscrupulous who prey on the unwary – typically recent immigrants willing to labour long hours in dreary businesses, unaware that those operations have little chance of prospering – using them as pawns in a shadowy real estate game. Rather than reflecting an insatiable consumer demand, he inquires acidly, is it possible that all those new doughnut shops may reflect a quiet understanding between landlords and franchisors that the best way to fill fallow commercial property is to sell franchises to credulous investors? Franchise book of interest to anyone who pays taxes, Ann Finlayson, November 1, 1997

Finlayson strikes a cautionary note, specifically about the hinted at misuse of the Canada Small Business Financing programCSBFP:

Does all this matter to you? Yes, it does. In 1993, in the wake of vigorous complaints by small-business owners that Canadian banks were reluctant to finance them, Ottawa raised the ceiling on loans guaranteed by the Small Business Loans Administration to $250,000 and its guarantee rate from 85 per cent to 90 per cent, sparking a bank lending rush to franchisees and shifting the risk of franchise investments onto taxpayers’ (your) shoulders.

The Risk: Only a fraction of the Liars’ Loans are ever claimed by the banks, thereby grossly understating Industry Canada’s default statistics (Franchised v. Non-Franchised loan performance). The franchisee thinks he signed a government-backed loan but it never gets registered as such. As their bankruptcy, loss of life savings, marital and family breakdown escalate over the life of their 12 to 18 month franchise career, the franchisee NEVER looks to Box 9 of the CSBFP loan application form (Projected Sales ) as the source of their trouble; where the lie is put into the “Liars’ Loan”. The proceeds of these engineered-to-fail loans is split upfront by the franchise banker with the bank, banker, franchisor and sales agent. If questioned, the bank shreds the paperwork and waits for the lawsuit.

And, seriously, how many of these Immigrants as prey losers could or would ever sue a Schedule 1 chartered bank?

The Return: Smashing quarterly earnings goals, record profits, high turnover in the small business division of each of the banks, and making franchise lending the most lucrative form of commercial lending in Canada. Private gain/public loss enabled by a criminogenic environment, moral hazard, regulatory capture…

Lorinc carefully mentions the “windfall profits” in this arrangement of churning:

What’s more, some banks and franchisors have put the SBLA program [predecessor government guaranteed loan program] to questionable use during foreclosure actions against franchisees, says one former owner who has been through the process. When a bank calls a loan against a non-performing franchisee, the 90% guarantee effectively relieves the bank’s receiver from trying to get the best possible value while disposing of the owner’s assets. With most of the loan covered by the Canadian taxpayer, the assets – fixtures, kitchen equipment, inventory, etc. – can be sold quickly at a deep discount, possibly below market value. This allows the franchisor too step in and buy back the property at better-than-firesale prices, thus generating windfall profit when the store is later re-sold to another franchisee.

An important work that, depressingly, is as relevant in 2012 as it was in 1995.

______

Disclosure: My lol pecuniary interest here and here. Cross posted on FranchiseBanker.ca.


franchise Churning: Sell ‘em, Take ‘em back and Sell ‘em again

December 14, 2009

“I should have bought a fucking Hortons,” so Peter told me.

Maybe yes. Maybe no.

Peter Bell is an original.

He and I were Ontario Nutri-Lawn franchisees in the 1990s. He was in a partnership with a “friend” Marc Thiebaud at OGS, in the Oshawa/Whitby area.

Peter is smart. He didn’t take the legal dead-end like I did. But both he and I signed based on false earning claims delivered by wonky pro forma income statements.

In 1998, from the franchisor’s unusual point of view, Nutri-Lawn had 24 successful Ontario territories (ie. open, paying royalties).

From the franchisee investor another picture emerges. From 1990 to 1997 of the 24 territories:

  1. there were 17 franchisee ownership changes,
  2. 3 were on their 3rd franchisee, and
  3. 11 were on their second.

In 8 years in Canada’s most prosperous province.

Zero bankruptcies because everyone else sold their pig of a business to the next mark. I defied their stupid, hard-to-enforce non-compete clause and took my customers into another company while I fought them in Court. Mine (I think) was the only legal challenge and subsequent, rather high-profile bankruptcy.  Summary

Peter and I both got hung out to dry, but God, we had a few laughs.

Churning: the rapid selling, failure, retaking and re-selling of franchises. Can be intentional or unintentional but the outcome is the same for the investor. Useful to change the logo (old on top).

Lipstick on a pig.

A hallmark of even the bluest of “blue chip” systems.


SureSlim says: We are not a cult & +80% of our operators did not tank in 2008

March 1, 2009

sureslimnz

They must have just been unlucky in choosing their franchisees, then?

However, running a New Zealand SureSlim franchise seems to be a one-way ticket to losing your life savings and your home

A great article from New Zealand’s Sunday Star Times and Garry Sheeran called Big losers in SureSlim row head to court:

Failed SureSlim franchise owners are lining up to take legal action against the franchisor in New Zealand after 17 of the 21 SureSlim diet clinics here closed their doors last year.

SureSlim NZ says those businesses failed because people had cut discretionary spending on attempts to slim as the recession began to bite.

But franchisee business owners, themselves under fire from clients who paid money for diet regimes and now feel left in the lurch, say the SureSlim franchise model is the cause of their woes.

Here are some classic death rattles (sounds made just before death) of a failing franchise system:

  1. lost homes for franchisees but profits to lenders (lending due diligence?),
  2. churning: rapid re-sale of franchises (Fee1 gift to franchisor, sells to F2, etc.)
  3. can’t afford legal action to get money back or prove fraud,
  4. the business model is broken; sales free-fall (ie. 80% sales drop in 2008),
  5. 29% royalty and ad fund cost (unusual in that it is out-in-the-open; most charges are buried in mandatory products from the franchisor and their suppliers) ,
  6. franchisor slashes co-op advertising to during recession,
  7. independent accounting points toward “hugely questionable” franchisor actions,
  8. new president spewing excuses du jour RE: blaming the franchisees (bad lot with +80% tanking in one year: fire the s.o.b.s that accepted their applications!), and
  9. tip-of-the-iceberg litigation history in an older market (at least Oz has a toothless franchise law to plead).

The only bright spot is the honesty of a Sydney, Australia lawyer named Mark McDonald. He hits the nail-on-the-head for thousands of franchisees caught in franchising’s Trap for the Trusting:

“Most poor bastards caught in the SureSlim net can’t anyway because they have totally done their arse. And we discourage people from throwing good money after bad.”

Throwing good money after bad. An apt description of taking legal action against any franchisor in many countries.

  • I wonder how SureSlim is doing in other countries?

Franchise bankers are Always there for you (whoever you are)

December 23, 2008

friendIn August I wrote a post called Why Australia will get a McLaw.

WA Today ran a story this week by Chalpat Sonti called Franchising inquiry slammed as golden opportunity missed.

Perth-based Narelle Walter, a former franchisee who claims that an induced breach of contract left her out of pocket by $5 million, said the committee did not go far enough:

“Franchise renewals have not been addressed properly and I am distressed that the apportion of good will has not been determined,” she said.

“Franchisors can misuse this loophole in the franchising code and the (Trade Practices Act) to steal the assets of small business investors (through a process known as “churning”, when the franchise is on-sold by the franchisor to someone else).”

Interesting that Ms. Walter draws specific reference to franchise bankers co-operating closely with franchisors:

There was still a big incentive for banks to support the franchisor in the churning process, because they would rewrite loans with an [newer] “unsuspecting” franchisee, she said.

These allegations echo others, especially MP Jo Gash in my September post called Collusion allegation: AUS bank and franchisor.

I wrote about the very cozy franchise banker :: franchisor relationship in a paper to Industry Canada in 2005 called  Franchising Opportunism. It is also a good summary of how the Canadian and Australian franchise industry really works.

  • Feel free to download a pdf copy of Franchising Opportunism right here.

With friends like these bankers, investors do not need any enemies.


Homicidal McTurkey spotted in AUS

September 16, 2008

“Let’s not let turkeys kill the goose that laid the golden eggs.”

An interesting quote from John O’Brien, Chairman of the Franchise Council of Australia, NFC in a Smart Company article called: Franchise Council hits back at critics.

It seems Australia’s democratic process (ie. citizens speaking to politicians, members’ raising constituents’ concerns within parliament, Hansard records, governments asking House/Senate committees to look into areas of potential legislation, Joint Committees asking for citizens to contribute, yaddayaddayadda) has AUS franchise industry’s self-proclaimed “peak body”, a little miffed:

The Franchise Council of Australia has urged members to “push back” against claims of franchisor abuse aired in Federal Parliament last week.

A number of MPs, including NSW member Joanna Gash, told Parliament last week of allegations of churning, bullying and intimidation by franchisors. On top of this, a Federal Parliamentary inquiry into franchising was flooded by submissions from disgruntled franchisees.

It appears that Mr. O’Brien is sensitive to any lack of confidence in Australia’s franchise industry:

“If you are as annoyed as I am at these continuing smears against franchising, I urge you to email or write to the committee handling the inquiry right away,” he writes.

“Let’s not let turkeys kill the goose that laid the golden eggs.”

It was unclear to me who Mr. O’Brien was calling a turkey (bird brain?). Each or all of the following:

  1. Mrs. Joanna Gash MP, (duly elected in 1996 then re-elected in 1998, 2001, 2004 and 2007 by the fine people of the Electoral Division, Gilmore NSW),
  2. the other 7 MPs who have joined her in demanding immediate parliamentary action to curb franchisor opportunism (see Franchising at a crossroads),
  3. the Parliamentary Joint Committee on Corporations and Financial Services or
  4. the clearly diabolically obsessed mastermind, the thuggish: Deanne de Leeuw.

In any case, Big Franchising is always more than willing to “hit back” to get their way.

  • As any good fascist knows, democracy is the last refuge for losers.

Franchising as a dying Totalitarian State

July 22, 2008

Václav Havel is a Czech writer and politician.

I have played many roles within franchising. My overall approach is similar to Havel’s description of a dissident.

Definition: a person who actively challenges an established doctrine, policy, or institution.

The dissident does not operate in the realm of genuine power at all. He is not seeking power. He has no desire for office and does not gather votes. He does not attempt to charm the public, he offers nothing and promises nothing. He can offer, if anything, only his own skin — and he offers it solely because he has no other way of affirming the truth he stands for. His actions simply articulate his dignity as a citizen, regardless of the cost.

Franchising treats its opponents in a very harsh manner. I doubt if my notoriously short attention span could have been maintained if it weren’t for the shrill reaction of the industry’s leaders.

As always, those that challenge you are your best motivators and instructors.

You do not become a “dissident” just because you decide one day to take up this most unusual career. You are thrown into it by your personal sense of responsibility, combined with a complex set of external circumstances. You are cast out of the existing structures and placed in a position of conflict with them. It begins as an attempt to do your work well, and ends with being branded an enemy of society.

I believe we are very close to the end of Mom-and-Pop franchising.

The elite were the only ones using the industry’s specialized terms, words and language. Now every amateur observer is taking over the discussion. You can hear the professionals moan about their sudden loss of authority and deference over at Blue MauMau.

The degree of impertinence and questioning of the status quo regarding churning, integration clauses, FDDs, gag orders, FTC, etc. is a sure sign franchising’s Berlin Wall is crumbling.

When the internal crisis of the totalitarian system grows so deep that it becomes clear to everyone, and when more and more people learn to speak their own language and reject the hollow, mendacious language of the powers that be, it means that freedom is remarkably close, if not directly within reach.

The Information Sharing Project translates the mind-numbing, legal mumbo-jumbo “FranchiseSpeak” into common English usage. It speaks in the language of the investor, not the apologist lawyer.

It will, in fact, replace some of the functions of the franchise bar. It is a part of what will become a franchising expert system. This will assist in breaking the current economic monopoly on information and developing a common experience shared by the non-elite.

I collect franchise documents in much the same way as Charles Darwin collected beetles. Once you have them, you look for similarities and differences: you create a taxonomy which is the practice and science of classification.

A franchise industry taxonomy and expert system makes investor risk assessment more accurate.

Stripped of its propaganda and confusion, franchising is very similar to a Soviet Union gulag.


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