How many of the 25,000 Syrian refugees will become cannon fodder to the franchise industry via government guaranteed liar loans?

Several thousand, I’d imagine.

How? The moral hazard-riddled, Canada Small Business Financing Program.

Details:

• WikiFranchise.org: Immigrants as Prey, Cannon fodder, Language shortcomings create a vulnerability
• Franchising Opportunism, 2005 paper

 

 

 

Is the Tim Hortons takeover primarily a designed to fail, pump-and-dump, engineered financial product?

Canada has a well-earned, international reputation for franchise investors.

Image by John Fewings

Mom-and-pop Tim Hortons franchisee investments:

1. $1.8-Billion of current CDN franchisee cash flow is removed from +1,000 Canadian family’s life savings, and
2. replaced by a government guaranteed “liar loan” program (moral hazard) which will be the debt trap for the next-generation of CDN immigrant Tim Hortons franchisees?

see William K. Black and an criminogenic environment,

Weak Ontario franchise law + lapdog CDN insolvency law + predatory franchise lending = Canadian securities regulation weakest link into North American capital markets

Liar Loans deals: business brokers and specialized franchise bankers

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).

• see Andralex Food Services Inc. and Country Style Food Services Inc., Country Style Food Services Holding Inc., Jeff Young, Canadian Imperial Bank of Commerce, Sue Fedorink and Roger Noble

Are franchise bankers running a peep-show, a clip joint?

Franchising is low-grade entrepreneurial pornography.

Read Franchising Opportunism and you judge. The horrendous losses on unregistered guaranteed government loans are self-financed on inflated appraisals.

A clip joint or fleshpot is an establishment, usually a strip club or entertainment bar, typically one claiming to offer adult entertainment or bottle service, in which customers are tricked into paying money and receive poor goods or services, or none, in return.

Typically, clip joints suggest the possibility of sex, charge excessively high prices for watered-down drinks, and then eject customers when they become unwilling or unable to spend more money. The product or service may be illicit, offering the victim no recourse through official or legal channels. Wikipedia

The process by which banks create money is so simple that the mind is repelled. John Kenneth Galbraith

See Canada Small Business Financing Program and U.S. SBA 7a Loans [and UK and France and…]

One day, franchisee families will count

Each franchisor and franchisee with their own unique ISBN-type number.

Assigned by a private company under contract to the national franchise governing council with a corresponding gmail account accessible by both spouses, held confidentially by this corporation that is enabled legislatively to report to all levels of government. Online registration and due diligence portal protocol funded by franchise bankers (required number to get current account) and sponsored by industry and government authorities. Revenue neutral within 5 years (private or public equity funding?). Mediation intake, processing and reporting. Franchise bar credentialing. Pre-sale education. Industry and legislative program evaluation possible (ie. VetFran and others). Register all confidentiality agreements.

A basis for rational industry growth.

Within reach of any smart phone at pennies per entry.

Franchising more than helps flush +$100 million CDN annually down the toilet

A good Canadian Press article called Ottawa’s loan program for small business still troubled: report by Dean Beeby.The revenue paid to Industry Canada was supposed to cover the default claims paid out, but the math has never worked in Ottawa’s favour.

Claims paid out have risen steadily over the decade, and now top $100 million annually, while revenues have consistently lagged, costing taxpayers a net $335 million so far.

Put another way, cost recovery is currently at only about 60 per cent rather than the 100 per cent that was planned, and is in steady decline.

“The gap between claims and fee revenues will continue to exist and most likely expand,” predicts the KPMG report, dated Oct. 30 and obtained by The Canadian Press under the Access to Information Act.

The program’s portfolio of loans has become ever more risky over the decade, now catering especially to newly established small firms with weak credit scores and little collateral, many in the food-and-beverage sector.

These loans are used extensively in franchising although the franchise bankers frequently don’t even bother to try to register or make a claim on the phantom loans. The difference between new and used equipment nicely covers the money split between the mob (see here for details).

I’ve kept a close eye on the Canada Small Business Financing program and how the franchise industry misuses it (see my 2005 paper called Franchising Opportunism)

Program results from 1999 to 2008 using Industry Canada’s own Annual Reports (franchised v. non-franchised loans):

• Franchise Loan Claim Rate was 26.5% higher (than for Non-franchised loans).
• Franchise Loan Default Rates resulted in over $22.9-million more Claims (Non-franchised rate).
• The mean Franchised loan was 43.4% higher than Non-Franchised.
• The mean Franchised claim was 11.9% higher than Non-Franchised.

Comparing the years 2008 to 1999:

• The Claim Rate increased 858.2 times for Franchised (245.1  times for Non-franchised loans).
• The Franchised Claim Rate accelerated 3.5 times more than Non-franchised loans.

I’d be happy to send anyone the spreadsheet.

The U.S. Small Business Administration’s 7a. loan program seems to be sticking their citizens with a $70-83-billion public debt, too.

U.K. franchisor leaders record a new ethical Low: Hard-selling to the recently Unemployed

Talk about stealing a guy’s life savings when he’s down.

And when I thought I had heard it all and that franchise hustlers would do anything for a sale.

Now word out of Liverpool that their franchisor-only trade association, British Franchise Association, BFA is hard-selling directly to recently laid off UK workers, via their former employers.

It’s like a scene out of the movie, GlenGarry Glen Ross, totally hardcore, old-school boiler room ABCs (always be closing):

We’re adding a little something to this month’s sales contest. As you all know, first prize is a Cadillac Eldorado. Anybody want to see second prize? [Holds up prize] Second prize is a set of steak knives. Third prize is you’re fired.

Lie. Cheat. Steal. All In A Day’s Work. Source

It reminds me of the ambulance-chasing personal injury lawyers forcing their business cards into the hands of people lying in the street from a car accident.

• And this if from an association that claims to be “Promoting Ethical Franchising“.

Obviously, what I (or the British public) consider to be ethical business behaviour may not be what the BFA brain trust considers to be fair game. The 2 characteristics of an ideal franchisee are: Did their cheque clear and Can they fog a mirror (alive)?

The story (Franchising could be your next career move) is a little awkwardly worded but these are the most flagrant lies that support this propaganda piece:

1. franchising is a lower risk than non-franchised businesses (proven to be false),
2. a BFA franchisor is less risk than someone who is not a member (not proven),
3. the BFA is a benevolent society doing a public service (they serve their members’ interests),
4. franchisees fail only because of their sloth or stupidity (fraudulent systems?) and
5. the BFA represents both franchisors and franchisees (only franchisors).

All of these assumptions are false and dangerous. The BFA executives are either incompetent or knowingly perpetuating a cruel fraud, this time on the newly laid-off Brits.

• You will be preyed upon when you are at your weakest time in your life.
• Unemployment is an excellent time to buy into a phantom dream (In business for yourself, not by yourself; Be your own Boss) because you want so much to believe it (mortgage, kids, debt, etc.) you are temporarily a very shitty decision maker.

I know. I signed my franchise agreement two weeks before my unemployment benefits were to run out in 1992. BTW: an Ontario Justice said in 2000 that I had done the best due diligence she had ever seen but still lost $140,000 in 4 years, being sued, bankruptcy.

Another veteran but anonymous observer, Lionel Hutz PA, picked up the story and wrote about it on Blue MauMau under the following banner, BFA Wants Unemployed to Buy a Franchise. Lionel leads in with:

The British Franchise Association, the counterpart to America’s International Franchise Association, is directly approaching companies that are laying off employees, to persuade those newly unemployed to buy a franchise from one of their franchisor members.

Lionel goes onto say and pose a most relevant question:

Note the false claims that franchised businesses have higher success rates, and the assertion that British Franchise Association members must “meet the strict ethical and business criteria.” I wonder if the BFA has ever expelled a franchisor for bad franchising conduct?

Ray Borradale, a very effective Australian franchisee advocate and mouthpiece chips in with:

AFA, BFA, IFA and FCA read from the same book.  This is symptomatic of franchisors; good and bad – and it is dangerous.  I note the reference; “educate people about the many benefits of buying into a franchise” with contempt.  Where is the education about risk and due diligence?  This unbalanced marketing of franchising is not new and BMM has covered many similar stories. It is misleading and deceptive but it appears to be accepted by authorities in every country. [I would add the CFA to Ray’s list of talking heads.]

Remember: Franchising is practiced identically around the world. Some countries know about the dark side of franchising and have developed national spokespeople to combat the propaganda. Some countries (like the U.K.) do not know.

IN CONTRAST, note the level of discernment found in this Australian headline of January 26th (care of Franchise-Chat.com), The Franchising Trap:

The Australian dream of becoming self-employed can be the path to financial security, but it can also go disastrously wrong.

For years franchising has been viewed as a reliable, somewhat less-risky option for small investors looking to start their own business. But the 500-plus complaints received by the Australian Competition and Consumer Commission every year arising from disputed between franchisees and franchisors show that franchising is often not the easy entry to business that some people think.

In the U.K. there is a greater danger than is faced by franchise investors in Australia.  Aus does not have a small business government guaranteed program, but the U.K. does.

• A guaranteed loan program can be misused to fuel franchise fraud. I wrote about it in Canada, I know that that it is happening in the U.S. and also in the U.K.’s aptly named Small Firms Loan Guarantee Scheme.

Heads up to these other countries that have a similar loan guarantee program for small business (Canada CSBFA, U.S. SBA 7(a), and U.K. SFLG):

1. Korea,
2. Japan,
3. European Union (Netherlands, Denmark, Belgium, France & Germany),
4. Indonesia,
5. Malaysia,
6. Nepal,
7. Philippines and
8. Taiwan.

Every country gets the type of journalism that it is willing to accept from it’s traditional media outlets. This type of breathless and mindless regurgitating of franchising propaganda is almost never seen in the U.S., Australia or Canada anymore. It was pushed out by volunteer franchisees getting on the back of its nation’s business editors.

• These blatant lies will continue as long as they are not shot down by a small group of knowledgeable, experienced and vigorous group of Web 2.0 U.K. warriors.

Their basic training can begin once they choose to speak out.

Abolish the SBA: $70-83B reasons why it should happen

Private gain, Public loss.

Banks, like all buisnesses, just love it when governments underwrite their risks.

It’s only a bonus when Joe Q. Public gets to pay for the drunkard’s binge of “aggressive” to predatory to outright fraudulent loan practices.

Canada, the United Kingdom and the U.S. all have small business loan programs which guarantees defaults.

The North American franchise industry relies very heavily on this debt program to fuel franchise sales. In Canada, the Canada Small Business Financing program is almost the only debt that Schedule 1 banks will offer for franchises (last time I checked).

The U.K. industry discernment is still embryonic. Their Small Firm Loan Guarantee scheme, SFLG is run by the Department of Business, Enterprise & Regulatory Reform, BERR. By the looks of  The Royal Bank of Scotland site, SFLG loans are a big part of the U.K. franchise industry also.

• Blue MauMau is the most active centre for franchise investor concerns in the world. Tellingly, SBA Loans Free Fall is a current headline.

Dr. Veronique de Rugy, adjunct scholar at the CATO Institute in 2007 (and now senior research fellow at the Mercatus Center at George Mason University) presents some very important facts from a CATO Daily Podcast [see below].

Specifically the U.S. Small Business Act, SBA loan program:

1. may end up costing citizens $70-billion (maybe $83-B?, if defaults climb faster than projected; unfunded debt that will be added to future taxpayers),
2. with less than only 1% of small businesses taking out a SBA loan per year, it’s irrelevant economically,
3. was created 53 years ago when credit information was much harder to determine (program has not evolved as information sharing has improved),
4. of the loans that are currently on the books, they are “defaulting massively” (SBA loans disproportionally finance doomed business ventures), and
5. only has 3% of women or minority-controlled firms take take out a SBA loan per year (as a social program it is a bust: 97% of these “discriminated against” groups get their debt elsewhere).

All of this begs the question: If the 7a Loans are defaulting like mad who exactly are benefiting from this program?

To her credit, Dr. de Rugy points directly to the banks and their capacity to sell off the 75% government guaranteed portion on the secondary market and stick the massive debt to the taxpayers if their own default projections are understated (ie. d/recession).

The banks love SBA loans (in a technical sense) because:

1. 60% of all loans are underwritten by the 10 largest banks can exert market influence even within a very decentalized banking system, comparatively, (in Canada it’s worse: 82.5% all guaranteed loans with Top 5 bankers, 2000-05: FOI author) and
2. the return on equity for is a minimum of over 3.8 times higher than for regular loans (SBA: 70% v. Regular loans 15-18%).

Listen to the 9:06 podcast and see how $70-billion could be added on top of the current +$700-billion banking bailout. I can’t help but note how fuzzy the banks are so far on accounting for the first bailout installment. [click here]

According to Dr. de Rugy, the SBA loan program serves two very powerful masters:

1. “lawmakers who have successfully sold the SBA as a program to help the so popular small businesses and
2. the banking industry, which profits by issuing and selling the low-risk, government-guaranteed small-business loans.”

As of the end of 2006, the SBA had nearly $83 billion in outstanding guaranteed loans that the taxpayers – not the banks – would have to pay if the economy experienced a serious downturn.

BANKING ON THE SBA: Big Banks, not small businesses, benefit the most from SBA loans programs, Veronique de Rugy, August 2007, 4 pages

Midnight move: This time into the gutter

The top image is from a Canadian Press article by Nelson Wyatt called Passersby stunned as restaurant contents emptied into Montreal street.

It also hit Canada’s evening television news program, The National and resides on the CBC website where some rapidly growing comments are worth checking out.

1. What the hell happened here?
2. Whay would a Montreal, Canada franchisee simply rip everything out (including cash from tips!) and leave them on the street?

There is a perfectly good and rational reason for this. These were the actions of a perfectly sane, far-sighted and indeed shrewd small business investor.

• he or she realized they were going bankrupt no matter what they did (things they can control +/- = wisdom),
• they did what they thought was the noblest thing to do which was to deny the franchisor and bank their profits on this churn while
• demonstrating a fine French Canadian tradition of exiting with a some self-respect intact (see bottom image).

Here is what might have happened if this is like other franchise relationship meltdowns I have seen in the last 10 years:

Normal Contract Terms:

1. The franchisee leases the premises from the franchisor (who then leases it from the landlord). The franchisee is the subleasee: he pays the franchisor who (you hope) pays the landlord. This may or may not have been the case here. (How quickly a new body can be installed indicates a franchisor head lease position.)
2. The franchisor has the legal right to withhold their approval if a franchisee brings forward a proposed buyer. Some do it to drive an exiting franchisee into a corner.
3. The operator’s franchise agreement with the franchisor says: “If the franchisee breaches the agreement, in any way at all, (70 pages long, including operating manuals, debt payments, appendices, etc.) then that automatically means that the lease has been breached (cross-default: much easier, faster, cheaper to throw a franchisee onto the street than to sue them under the body of the agreement).
4. It appears that there were some franchisee free riding but we’re only hearing Enzo’s side of the story. I don’ t think his life savings were on the line because of his “training and operational deficiencies”. Yeah right.
5. On a breach with a “non-compliant” [shithead] franchisee, the franchisor and/or landlord can padlock the store but they can’t touch the equipment or supplies because it’s owned by the franchisee.
6. The franchisee is therefore faced with: the right of ownership without any rights to the location to operate the business.

The next step is what happens 99% of the time:

1. The franchisee acts like a sheep. He sells either to (1) the franchisor (who operates for a short or long time) or (2) to a new sucker (I mean, Canadian small business franchise investor). Seldom do they debrand and become independent.
2. The franchisee sells because they think their business is worth, say, $400,000, and if they’re “a good little boy” the franchisor will let them keep 100% of the money.
3. The franchisor (knowing that the business is a dog or wanting to crucify this franchisee as a lesson to the flock) lets them keep 20% instead of the normal 15% because they can control the sale 4 or 5 different ways

What I think happened THIS TIME:

The franchisee saw through the trap. He knew or suspected that they were going bankrupt no matter what they did and that the equipment was already “underwater” (ie. it was of zero value to them but tied to massive debt. The only value it held was, mostly, in-place to the franchisor).

• The bank financed it for, say, $100,000 based on a bogus appraisal 12 months ago.
• The bank’s own receiver would only realize 15% disposal.
• The franchisor would re-buy the equipment (very specialized, an idiosyncratic sunk cost to be technical about it) on the day of auction and
• then sell on to the next more compliant investor (Sucker2?).

Also he may have been wised to the fact that franchise bankers and franchisors have an “understanding”: long-term, very lucrative relationship spanning the whole franchise system over many years versus one lonely loser family.

ANALYSIS: Going bankrupt for either $300,000 or $250,000 or $450, 000 doesn’t matter very much, does it? The equipment may have actually been used when they opened up (when  they thought they’d be getting new.) The money that appears to be thrown away (on the street) was very minor when compared to the operating losses that have already take place.

The franchisee and his spouse as guarantors of the bank’s debt for the equipment (if they’re not already personally liable under the franchise agreement). btw: Incorporating a franchised business? Simply putting your lawyer’s kids through school.

And with the bank being able to have up to 90% of their loan paid for (if the equipment loan was cut from the Canada Small Business Financing program).

• What do does the bank care if some street people in Montreal were carting away a small businessperson’s life saving?

Ah: The beauty of dealing with other people’s money.

• the franchisor (franchisee’s life savings) and
• the bank (the franchisee and spouse’s bankruptcy).

Of course, this is all entirely speculative.