Liar Loans deals: business brokers and specialized franchise bankers

September 27, 2012

The lie in the government guaranteed loan: inflated future sales and 6 times value on assets (leasehold and equipment).

Predatory franchise lending program

  1. An unsophisticated CDN buyer is steered by the broker to a specific Schedule 1 banker who can “make the deal happen”.
  2. Industry Canada application form/logo used as bait, as credibility.
  3. Loan paperwork is only ever seen by government auditors IF a claim is made.
  4. Liar loans are never claimed as a loss to Industry Canada (above 3% interest, admin fees, $ above real value more than make up for reckless underwriting).
  5. Deal is papered within 24 hours including compliant appraisal.
  6. Bank’s money in; franchisee’s money in.
  7. Money out of franchisee’s current account: a. to franchisor who pays broker and b. bank’s own treasury.
  8. Sales never show up. Value of franchise on a cash flow basis is negative. Franchisees subsidize and burn through rest of life savings.
  9. Franchisor manages the inevitable business collapse.
  10. Bank’s receiver sells assets at 15% of previous value within 18 months to franchisor.
  11. Consortium repeats steps (go to 1).


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.


If you lost your money, Call your franchise banker.

October 27, 2010

Get smart.

Who do you think teaches new franchisors or amateurs like David Scenna (Hookers and Booze: Your tax dollars at work) franchise money management?

D’oh.

Your franchisor is nothing much more than a rodeo clown.

  • The brains behind the outfit are the franchise bankers. Only a fraction of the government loan losses are claimed because accurate reporting would queer the deal. They self-finance the used franchises via compliant equipment appraisers on the front end and their captured bank receivers on the other (exit franchisee into bankruptcy.
  • See 2005 details.
  • Crapola franchises.

Last time I checked, +80% of Canada Small Business Financing program loans were done via these people below. Why not give them a call and ask them for a 10 minute interview?

Bank of Nova Scotia
Mr. John Dykeman
Ms. Irene Thomson
National Franchise Programs
Phone: (877) 252-6088 Toll Free
http://www.scotiabank.com/franchising
franchising@scotiabank.com

BMO Bank of Montreal
Mr. Steve Iskierski
Senior Manager, National Franchising Services
Phone: (416)927-6026 / (877)629-6262
Web: http://www.bmo.com/franchise
steve.iskierski@bmo.com

Canadian Imperial Bank of Commerce, CIBC
Mr. Charles Scrivener
Director & Head, CIBC Packaged Loans Group
Phone: (416) 980-3225
http://www.cibc.com
charles.scrivener@cibc.com

Royal Bank of Canada
Mr. Paul DaSilva
National Franchise Market
Phone: (416) 974-8299
http://www.rbcroyalbank.com/franchise
paul.dasilva@rbc.com

TD Canada Trust
Ms. Irene Law
National Manager, Franchise Banking
Phone: (866) 871-2178 / (416) 307-9270
http://www.tdcanadatrust.com/franchise
irene.law@td.com

Source of contact information


Collusion allegation: AUS bank and franchisor

September 18, 2008

In a Smart Company article by James Thomson called MP renews calls for investigations into mistreatment of Bakers Delight franchisee, he quotes:

NSW parliamentarian Joanna Gash has renewed calls for the Australian Federal Police to launch an investigation into accusations Bakers Delight and ANZ bank colluded to put a franchisee out of business.

Quoting emails between the franchisor and the bank, Gash alleges:

On Monday, Gash revisited the case in Parliament, producing emails from Bakers Delight chief financial officer Richard Taylor and ANZ executives that she says shows “plans had been conspired to terminate Ms de Leeuw’s franchise well ahead of time”.

The bank and franchisor deny all the allegations.

This is the first public AUS public allegation of the key franchisor:franchise banker relationship that I identified and wrote about in a 2005 paper for Industry Canada called Franchising Opportunism [free download].

The Royal Canadian Mounted Police did a 10 month investigation of a related predatory franchise lending matter. [free download: Mounties investigate 'predatory lending', Ottawa Citizen, March 25, 2006]

And Mr. Oudovikine is accusing the bank of transferring the loans to Country Style without his authorization before he had a chance to obtain a business plan and other financial details from Country Style.

Mr. Oudovikine says his case shows how big banks, franchisors and franchise brokers team up to take advantage of franchisees, many of whom are recent immigrants like him.

“It’s predatory lending. (CIBC) didn’t do any of the due diligence they should have done,” says Mr. Oudovikine, who sent the Citizen e-mails confirming the RCMP investigation. An RCMP official said the police force doesn’t confirm or deny investigation.

And the Canadian bank’s reaction?

Mr. Oudovikine says he has repeatedly contacted senior CIBC officials and executives about the loan dispute, to little effect. He alleges that CIBC breached the Canada Small Business Financing Act regulations that require lenders to conduct due diligence on borrowers, including their ability to repay loans.


The Apprenticeship of Les Stewart

May 17, 2008

It takes a special background to be effective in dealing with modern corporations.franchising

Some background:

  • born on RCAF Station Senneterre, PQ, 1959,
  • school: Cedarview and Forest Hill in Midhurst, St. Mary’s, St. Joseph’s and North Collegiate in Barrie (Grade 13: 1978),
  • member and Chief Squire of St. Patrick’s Circle 536 & Ways & Means Chairman of the Ontario Provincial Board, 1978,  Columbian Squires, Barrie, ON,
  • twice a franchisee (Arjay Painting and Nutri-Lawn, Midhurst, ON),
  • a franchisee’s crew Barrie and 1st assistant manager, Orillia 3254, McDonald’s Canada (B.O.C., Silver Hat, & AAA, 1972-80),
  • general BA (political science, 1983 Western University and MBA, 1987, Ivey Business School, London, ON,
  • Medical audit coordinator, St. Thomas Psychiatric Hospital, St. Thomas, ON (1987, provincial psychiatric hospital),
  • Budget analyst, Victoria Hospital, London, Ontario, (acute care regional teaching hospital, 1988-92),
  • founded Canada’s 1st national franchisee association, Midhurst, ON (Canadian Alliance of Franchise Operators, CAFO, 1998-2005),
  • been sued twice: Nutri-Lawn‘s then owner, The Franchise Company (FirstService Corporation) and then then by a consulting client’s franchisor (Tupperware Canada Inc.), SLAPP,
  • took my franchised lawn care business independent in 1998 (Lawn Depot),
  • represented myself at an injunction hearing, franchisor unsuccessfully sought to enforce their non-compete clause, Barrie, ON, 1999 (Justice Paul Herminston, Barrie), favourable outcome,
  • 5 day civil trial, (Justice Katherine Swinton, Toronto,  May 1999) and lost a$134,000 unfavourable award,
  • unpaid policy analyst for Mr. Tony Martin, NDP MPP, Sault Ste. Marie, ON 1998 to 2001 (provincial, federal politician),
  • expert witness at public hearing which lead to Ontario’s first franchise law, Toronto, ON (Arthur Wishart Act (Franchise Disclosure), 2000),
  • Hazardous Waste Fire Investigation: Snow Valley Road, Midhurst, ON, researched and acted as community co-ordinator in a large Philip Environmental fire at the hazardous waster transfer site at 1131 Snow Valley Road, Midhurst, ON, summer 2003,
  • created the Information Sharing Project and submitted unsuccessful project proposal to the Ontario Ministry of Consumer and Commercial Affairs in 2003 (digital teaching, due diligence and business risk assessment tool; embryonic form of WikidFranchise.org),
  • identified and wrote a paper on Predatory Franchise Lending to Industry Canada, 2005 (18 month investigation: bank, consultant, franchisor, Office of the Privacy Commissioner of Canada, Minister of Finance, RCMP Commercial Crime Unit, OBSI, FCAC, PMO, etc.),
  • case preparation for a +$6-million civil law suit based on predatory lending principles (2005),
  • media contributor, 1997 – present,
  • contributed to the Prince Edward Island, Ontario, West and South Australian franchise inquires, http://www.cafo.net (ret.),
  • Blue MauMau contributor: 459 posts (since Oct 2007),
  • founded and editor of FranchiseFool.com weblog: 1,127 posts, 180,549 views & 817 comments (since Feb 2008),
  • founded and co-editor of WikidFranchise.org: independent franchise industry reputation wiki, 1,639.540 views since Feb 2009,
  • founded and editor of FranchiseBanker.ca weblog: 38 posts, 2,560 views & 3 comments (since Mar 2012)
  • endorsed Bill 102, An Act to amend the Arthur Wishart Act (Franchise Disclosure), September 23, 2010,  Legislative Assembly of Ontario (start @ 1440),
  • attended the International Association of Franchisees and Dealers annual conference, Indianapolis, 2010,
  • attended Ontario Bar Association annual Franchise Law Conference (2009 and 2010),
  • member since 1978 & Knight of the Year,  2011 for Barrie Council 1626, Knights of Columbus, Barrie, ON,
  • leadership training and support to independent franchisee associations (members, boards and executives),
  • team member: management consulting team specializing in mom-and-pop business format franchising,
  • pre-trial development of large-scale group and class action legal actions,
  • case preparation for a +$300-million class action law suit based on good faith, right to associate and mental distress ($50,000 award for one franchisee, 2008-2012),
  • founded and editor of SpringwaterParkcc.org weblog, to create a sustainable business plan to save Springwater Provincial park in Midhurst, ON,: 326 posts, 28,387 views & 233 comments (since Oct 2012),
  • founded and editor of iLoveMidhurst.ca weblog, an investigation into the Midhurst Secondary Plan in Midhurst, ON: 335 posts, 21,940 views & 54 comments (since Dec 2011),
  • founded and editor of MidhurstSchoolDays.ca weblog, 16 posts, 2,224 views & 23 comments (since Jan 2012), and
  • ongoing investigations (Les Stewart Consulting, 2000, LinkedIn).

Franchisee Narrative

February 25, 2008

It is very useful for a franchisee to write down in their own words a history of what happened from their point of view.

This is an outstanding example of a franchise investor’s narrative. In July 2005, it was written in preparation of what would become a 10 month-long Royal Canadian Mounted Police, Commercial Crime Section investigation.

We would like to help reduce the risk of franchise relationships being used as a vehicle for increased white-collar crime in Ontario. The high cost of litigation and franchisor intimidation make Ontario franchisees defenseless.

Several stakeholders, with this lender only being an example, exploit this systemic problem. Current Ontario franchise policy actually increases the risk to small business investors.

Thank you again and I look forward to working with you.

The RCMP officers were kind enough to suggest that a lawsuit was always possible when they informed the Oudovikines that they would be stopping their criminal investigation.


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