Franchisors starve while industry rag sharpens the axe spin

Might consider not putting your neck on the block this Easter.headlesschicken1McChicken (not eggs) are on the menu this season to an increasingly desperate selling machine.

An interesting article from Franchise Times this month, entitled: Tight credit is turning franchisors into lenders.

It almost makes sense blaming the credit crisis for making selling new outlets next-to impossible.

It has the almost-true ring to it, don’t it?

I agree that new franchise sales are in the dumpster and that the normal financing sources such as the SBA 7a loans and Canada Small Business Financing program have absolutely collapsed.

However, I believe that attributing it to the credit crisis is a huge misrepresentation

I figure the 7a and CSBF program loans have stopped because of the discovery of widespread fraud as defined by predatory franchise lending.

Notice how the industry media, franchisors, lawyers, lenders and consultants seem to speak as if they were one? Funny how they act as if they’re a group or one big happy family (less the franchisee), isn’t it?

This is why these are the business risks I coded when I sucked this article in

  1. Able to finance and sell negative cash flow franchise on crooked appraisals,
  2. Any excuse may satisfy a friendly editor,
  3. Appraisals grotesquely inflated,
  4. Appraiser and lender has cozy, repeat-business relationship,
  5. Bankrupt is bankrupt whether you put $1 or $1 million in at first,
  6. Buying an existing outlet even riskier than a new one,
  7. Churning (serial reselling),
  8. Desperate to sell any franchise for any price,
  9. Do the old franchisees get the same deal as the new ones?,
  10. Easy credit fuels worthless system sales,
  11. Even the “cheapest” will drain your past, present & future earnings,
  12. Excuse du jour, tight credit,
  13. False assumptions, multiple,
  14. Fee reduction always has a catch,
  15. Franchise bubble will crash much harder (non-franchised),
  16. Franchisor association public relations machine,
  17. Franchisor financing: faster in, out & resold (serial bankrupts),
  18. Franchisor guarantees franchisee debt,
  19. Franchisor picks up stores for a song,
  20. Franchisor takes franchisee store, resells to new dealer,
  21. Franchisor takes franchisee stores,
  22. Franchisor takes store and converts to corporate,
  23. Fraud financed by rigged appraisals used equipment & leaseholds,
  24. Higher short-term ROI to franchisor when churned (versus royalties),
  25. How much cash you put in at 1st is irrelevant,
  26. Kleenex system: tradename born to die quickly,
  27. Lending is subject to expert fraud because it is a credence good service,
  28. Lending duty never enforced via regulation or litigation,
  29. Loan servicers and brokers attracts fraud,
  30. Misrepresentations,
  31. Most lucrative form of commercial lending, franchising,
  32. Only one side presented,
  33. Ponzi (pyramid) scheme,
  34. Predatory franchise lending,
  35. Predatory franchising makes more money selling than operating system,
  36. Press release dressed up like journalism,
  37. Propaganda, thought-terminating cliches, The Big Lie,
  38. Reputation damage masked by confidentiality agreements,
  39. SBA 7a loans used to fuel franchise bubble,
  40. Selling price inflated by easy credit bubble,
  41. Sincerity,
  42. Sold for as much as much as they can get (next-to worthless),
  43. Sold only to people with no small business experience (very naïve),
  44. Spouse can sue for losses also,
  45. Spouse dragged into negative investment,
  46. Spouse must never sign any document,
  47. System designed to fail for franchisees

I don’t mind lies but I do dislike inaccuracies.

2 Responses to Franchisors starve while industry rag sharpens the axe spin

  1. Carol Cross says:

    Interesting Article in Franchise Times about franchise lending, etc..

    I thought I read that California has a special law wherein franchisors cannot become lenders for startup costs and equipment and lease improvements, unless they agree to only accept the equipment and lease improvements and inventory, etc.. as security. In otherwords, they can’t ask for the collateral of the franchisees home, etc.. if they are the primary lender to the franchisee.

    Do you have any way of checking this? This would mean that the franchisor would be assuming some of the RISK and would not be as apt to develope “churning” as a management tool to grow its visibility in the economy.


  2. Les Stewart says:

    No idea and no time right now to get into that level of detail.

    You can safely assume that legal/illegal has little to do with behavior these days when the franchise ponzi bubbles are bursting all over the place. Let me know what you find out.

    Have a great Easter weekend.



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