Want to talk about your experiences as a Kahala franchisee since 2013?

May 12, 2016

Contact me.Kahala Brands

Kahala Brands:

  1. America’s Taco Shop
  2. Blimpie
  3. Cereality
  4. Cold Stone Creamery
  5. Frullati Cafe & Bakery
  6. Great Steak
  7. Johnnie’s New York Pizzeria
  8. Kahala Coffee Traders
  9. Maui Wowi Hawaiian
  10. NRgize Lifestyle Cafe
  11. Planet Smoothie
  12. Pinkberry
  13. Ranch1
  14. Rollerz
  15. Samurai Sam’s Teriyaki Grill
  16. Surf City Squeeze
  17. Taco Time
  18. Tasti D-Lite

Multi-unit and mom-and-pops. On or off the record.

Les: 705 737-4635. les.j.stewart-at-gmail.com


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 WikiFranchise.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.


Business or real estate brokers’ role in franchising.

August 30, 2012

A clever animation that mentions Subway but is universal.

Spot on for the United States and fundamentally accurate for Canada and any other country.

  • Nice touch mentioning the veterans’ franchise program scams (VetFran).

See Little Caesars: Ist U.S. discount program Imported for Canadian military veteransJanuary 2009 post on FranchiseFool.com.

Cross posted on FranchiseBanker.ca.

 


Coffee Culture: likely legit or a FranWhack?

April 29, 2010

Nothing is certain in life and that goes for franchising, too.

Coffee Culture Café & Eatery sure looks like a winner. Very rich-looking, solid, many happy-smiling faces.

It is important to look past the flash, however. In the growth phase, who sells the offering says a lot about the credibility of the offering.

CJ Woodburn and Associates appears to be the 3rd party sales agent and lists the investment qualifications as:

“- Store hard costs start from $175,000 (this varies depending on size, conditions, landlord and location).
– Franchise Fee (10 years) $20,000.
– Royalty (weekly) 7%.
– Ad Fund (weekly) 2%.”

Weekly (not monthly) payments and no mention of head lease, equipment or product maximum margins.

When I asked a few central Ontario current, multi-year, coffee franchisees about the offering: Does it…

  1. look like a good deal  or
  2. is it what Richard Solomon defines as a FranWhack?

They were unanimous in their opinion.

Solomon’s The New Franchisor Scampaper in his Franchise Fraud series is good investment reading. The old bastard sums up:

If you think you can outsmart professional swindlers all by yourself, you really are not smarter than a fifth grader.

Don’t get me started who’s papering this… (ie. “special relationship” CSBFA-based franchise lender)


The Mob: A Working group of Professional Thieves

January 12, 2009

grouppeopleThieves steal to live.

Professionals in thievery and business behave in a very similar manner.

Only a tiny percentage of thieves are recognized and view themselves as being professional: full time, rational and consistent planning.

The most prestigious of theft rackets is The Grift or Con games. The Grift requires cooperation among specialists.

The working group of professional thieves is known as a mob, troop, or outfit. The number of members in a mob is determined in part by the racket which is being hustled, in part by the angles which are being played, and in part by the circumstances and situations…Sometimes a large number of thieves work together in a loose organization in the more elaborate confidence games, using a common pay-off joint or big store (fake gambling club or brokerage office.) p. 27

For any group to function productively, certain rules need to be known and obeyed. This discipline is generally higher than in straight business because of the extralegal nature of some of their work.

The mob has many codes, rules, and understandings, most of which are so general that they apply to the whole profession as well as to a particular mob. p. 35

I understand (from books alone) that they are:

  1. gains are divided equally (although, different for different roles),
  2. all payouts must be paid from the net take (expenses [or nut] first deducted from gross take),
  3. all loans must be repaid from the group’s first fruits (rigidly enforced),
  4. everyone shares in the profit or loss (good or bad),
  5. the fall-dough (shared cash) is used to protect any member of the mob,
  6. each member must deal honestly with each other (burning someone is a almost unthinkable, lying is considered more serious than in straight business),
  7. if someone leaves the mob, he must ask to be taken back (type of social norm or professional consideration),
  8. a member of the mob is not responsible for things outside of his control (appreciation for the role of randomness and luck),
  9. a mob member should not cut in on another member’s area of responsibility (reflects negatively on the competence of the “helped” member), and
  10. it’s “the responsibility of every member of the mob to do everything  possible to fix a case for any member of the mob if the pinch [arrest, exposure] occurred in connection with mob activities.” p. 38

In addition to their specialized skills, a professional thief must have a more general capability called larceny sense.

Larceny Sense: This term is applied to the thief just as the term “business sense” is applied to the business man. It is an ability to deal with unusual situations in the best possible manner and is acquired in the course of experience. Every thief with good larceny sense will try to figure out every eventuality in taking off a touch. Some thieves are considered to have no larceny sense, while others have plenty of it.

Quotations Source: The Professional Thief, Chapter 2: The Mob, The University of Chicago, 1937 [my emphasis]

Franchise marketing, for some systems, has evolved into a specialized, highly secretive applied fraud. Each trademark system has a number of 3 or 4 professionals working to sell and resell franchises that are designed to fail for the investor.

There is no boss per se within the group. Because the work is underground, there is little documentation available.

If there is a boss in the traditional sense, it would be the banker in head office who are within the small business lending division. These Franchise Bankers (one bank per franchise system) work very closely with the franchisor for their direct lending needs as well as setting up extremely lucrative service contracts for their franchisees (current accounts, merchant accounts, etc.).

In 2000, I interviewed Dan Farmer of the Royal Bank of Canada. He stated that franchise lending was “the most lucrative form of commercial lending there is”.

Roles & Functions

  • mark (potential franchisee),
  • sales agent (initial contact with mark, as the outsideman he steers marks to the mob’s preferred trademark; they are sometimes nominally independent, sometimes internal; also-known-as: consultants, franchise brokers),
  • franchisor contact (initially charming, aura of success, kept at arm’s-length until the loan proceeds are advanced and removed from mark’s current account), and
  • lender (specific bank official, specific bank branch: a high-risk, 24-hour turnaround on government guaranteed loans).

In their function as lenders, bank officers owe their borrowers a legal duty to perform lender’s due diligence. They are prohibited by law from creating debt instruments that they knew or should be reasonably be expected to know would be unsustainable or result in the borrower’s financial ruin. In Canada, the relevant statutes are the Bank Act and the Canada Small Business Financing Act and Regulations.

  • Banks and bank officers are not being held accountable because these arrangements, although highly exploitable, provide substantial profits to the franchise bar, franchisors, etc. Canada has a well-known reputation for harbouring white-collar criminals.
  • This, however,  is very, very fertile litigation soil for outside law firms that can know what questions to ask.

That I am a 1/3 partner in only one active lawsuit, speaks not to the rarity of the fraud but to my restraint and patience for the cleanup to happen. In 2005, we had identified over 12 potential lawsuits involving  just one franchise system, bank pairing.

Additional information on Predatory Franchise Lending and my recommendations to stop such abuse, can be found by in a paper I wrote to Industry Canada in 2005 called Franchising Opportunism: Deceit to secrsy confind. [Predatory Lending, IC Feb 2005]


Pickpocket signs & Disclosure Docs: The same outcome

January 5, 2009

Disclosure documents are the fraudulent sales agent’s best friend.

They:

  1. give the [to me, intentionally designed] false impression that some body in authority is overseeing franchising (note the federal agency’s logo, illusion of relevant information, see Robert Cialdini, Authority as “Weapon of Influence”) and
  2. identifies very efficiently and early the sucker’s major source of ignorance and fear (the obstacle the predatory member of the selling mob needs to overcome to close the sale).

Pickpocketing (or “the cannon” in professional thievery lingo) usually consists of two, three or four people working in a mob (a group of experienced specialists). It is an ancient underworld art that has been profitably practices for centuries. It relies on distraction, manual skill and very close cooperation between specialists within the criminal group.

The operation consists of 5 basic steps:

  1. Fanning: determining which pocket the wallet is in,
  2. Pratting the sucker: pushing the mark (intended victim) around gently in order to distract his attention and to get him into a good position for the next operations, (usually done by the “stall”, sometimes by faking drunkenness),
  3. Put the Duke: someone else the “hook, wire, or tool” puts their hand (“Duke”) into the victim’s pocket and removes the poke (wallet),
  4. Cleaning: the hook then transfers the wallet to another member of the mob who
  5. Stashing: takes the wallet off-site so if the next mark objects, the whole day’s take isn’t at risk.

A “Beware of Pickpockets” sign is very helpful to pickpocket professional thieves because:

…whenever a sucker sees this sign he feels the pocket in which his money is located to discover whether his pocketbook is still there, thus relieving the mob of the necessity of fanning him [see Step 1, above].

The Professional Thief: An astonishing revelation of criminal life, The University of Chicago Press, 1937

Disclosure documents assist opportunistic sales agents in a similar way. They not only trade on false authority but provide an efficient means of defining the next mark’s fears.

  • Defining a sucker’s fears goes a long way toward getting the chump to sign.

Disclosure laws have never been designed to protect potential investors and they are emphatically not a step toward Relationship Laws.

Disclosure and relationship laws are McLaws (intentionally ineffective) in protecting investors’ interests against the major ROI threat: future franchisor opportunism.


%d bloggers like this: