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.


Miracles do not, in fact, break the laws of nature.

May 17, 2010

Once upon a time…

I’m free, 100% clean, I made it to the other side.

I behaved mostly okay, was given the gift of poverty without leaving home, and tried acted as if my life depended on it.

In business meetings, the old is always attended to before the new can be introduced (Tupperware, Country Style, Mr. Sub, Water Depot, WIP). The door’s open but the ride it ain’t free.

Miracles are a retelling in small letters of the very same story which is written across the whole world in letters too large for some of us to see.

It matters enormously if I alienate anyone from the truth.

All that we call human history–money, poverty, ambition, war, prostitution, classes, empires, slavery–[is] the long terrible story of man trying to find something other than God which will make him happy.

Χάρων, C.S. Lewis 1898-1963, Fisher King 1, 2 1991


Does a state of war exist in your franchise system?

April 22, 2010

Yes or no.

Is someone trying to kill your life savings?

Your franchisor has declared war on you whether or not you care to acknowledge it.

Your choice is to throw panzies (trot off to lawyer, talk) or panzers.

Blitzkrieg (German for “lightning war”): see Heinz Guderian.

Rebranding is the fastest method for franchisor to strip cash just before a dirty intentional insolvency.

The definition of throwing good money after bad.

Man schlägt jemanden mit der Faust und nicht mit gespreizten Fingern. (You hit somebody with your fist and not with your fingers spread.) Guderian quotes

Of Guderian:

Sixty per cent of what the German Panzer Forces became was due to him. Ambitious, brave, a heart for his soldiers, who liked and trusted him; rash as a man, quick in decisions, strict with officers, real personality, therefore many enemies. Blunt, even to Hitler. As a trainer – good; thorough; progressive. If you suggest revolutionary ideas, he will say in 95 per cent of cases, ‘Yes’, at once. General Freiherr von Geyr

Some warriors behave nobly despite being surrounded by human filth.

Life after the war

  • Together with his Panzer staff, Guderian surrendered to American  troops on 10 May 1945 and remained in U.S. custody as a prisoner of war until his release on 17 June 1948. Despite Soviet and Polish government protests, he was not charged with any war crimes during the Nuremberg Trials, as his actions and behavior were ruled to be consistent with those of a professional soldier.
  • After the war he was often invited to attend meetings of British veterans’ groups, where he analyzed past battles with his old foes…. Wikipedia

Sotos LLP: The McDonalds of CDN franchisee lawyers?

November 27, 2009

I have learned directly, personally, in-their-armpits relationships from the best in franchising.

Ted Gorski, McDonald’s, CollegePro Painters, Nutri-Lawn, Tony Martin, Canadian Imperial Bank of Commerce, Sam Grange, John Lorinc, Paul Herminston, Katherine Swinton, Canadian Franchise Association, Country Style, Gillian Hadfield, Michael Webster, Jay Harris, etc. They’re all brilliant in their areas of expertise.

When I got into a corner and thought I needed legal help I hired the best I couldn’t afford. John Sotos was my on-and-off-again lawyer from 1998 t0 2000 and I learned a great many things from John and his partner David Sterns. Both John and Michael told me to look at and talk to the banks. Oddly enough, the first lawyer I talked to about franchising in 1982 is now a Ontario Superior Court justice in Barrie. I like lawyers but they’ve got to cover their rent too, you know!

Many franchisees want to fight.

That’s good…and bad at the same time.

Many franchisees think in terms of black and white; now or never; us/them.

That’s good…and bad at the same time.

Many franchisees would rather choose a “white knight” professional instead of a group of franchisees plotting their own course.

That’s not good…and really, really horribly bad.

The McDonald’s U.S.A. president described his corporation as a real estate company with an interest in hamburgers. Let me repeat: McDonald’s is a landlord (to franchisees) with an interest in fast food.

I learned that the economics of modern litigation is very similar.

  1. The franchise industry legal cash flows = 95% by franchisors,
  2. Once the retainer is paid any consultants are shown the door (only one expert, please),
  3. Franchisees are one-shot clients (v. repeat business for franchisors),
  4. Disclosure laws are a God-send for billable hours, and
  5. The industry has a very, very long memory for those that oppose it’s interests.

All lawyers are businesspeople that operate in a near-monopoly on certain words and concepts.

Learning these terms is not hard if you have (1) a learning tool and (2) a willingness to face some difficult facts.

Most let their emotions rule their decision making (ie. denial and fear) but in their defense, aren’t really conscious of doing so. They’ve been conditioned to be on their knees and look to Daddy for acceptance.

Education is the only way out.

WikidFranchise.org


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).

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