If we forget, We will continue to repeat our mistakes

August 4, 2009

WikidFranchise.orgWe created WikiFranchise.org to house the documents that I have collected and to start a dialogue.

A wiki‘s strength is in its volunteer editors.

Time will tell whether other people find this franchise industry-only indexed archive useful.

It has some merit for teaching and learning about the business risks that sometimes run counter to the overwhelming advertising message to say “yes” to every half-baked concept.

The latest, saddest example I added to WikidFranchise today is from the Washington Times’s Elise Anderson, entitled: Jobless seek future in franchising.

As Elizabeth Winterhalter and her husband, Monte, packed up their house in Glastonbury, Conn., for their move to McLean, they were eager and anxious about trading the pain of unemployment for the promise and peril of something they had never tried before — running a franchise.

Good grief.

I wish the Winterhalter, Dillen, and Prioleau families all the very best as a personal and financial outcome but I hope Ms. Anderson follows up with them in 6 or 12 months. As for the expert that Anderson solely relies on?: Alisa Harrison has been with the franchise industry for a total of 1 1/2 years.

Banks won’t do Franchise loans: It is true that there are no normal or even government-subsidized (SBA) loans to be had now.

The reason: an emerging crisis that implicates the 7(a) Loan program of the U.S. Small Business Administration which has a long and consistently scandalous history.

Predatory franchise loans are becoming visible to everyone: loan brokers, banks, re-packagers and politicians. The public bailout of the franchise industry’s greed is what is freezing everyone in their tracks: not a recession. Pending fraud indictments tend to chill even the shadiest franchising financing scam.

Estimates of a public bailout of $70 to 80-billion will seem quaint if an accurate, non-biased accounting were to ever take place.

Don’t expect to see any breaking news stories about this on Franchise-Chat.com or BlueMauMau.org either: these off-message stories are skimmed off before they hit any franchise RSS feed. Keep the kids busy talking about the evil empires (MBE, Quiznos) or arbitration reform or how franchisees are to blame.

What I do: I took the article, coded it and saved it in WikidFranchise. Here are the business risks I assigned to it:

  1. Cannon fodder,
  2. Desperation causes bad decision making,
  3. False hope,
  4. Financing with 401k money is totally reckless,
  5. International Franchise Association, IFA,
  6. Only one side presented,
  7. Loss Aversion: people dislike losing much more than winning (the same $),
  8. Professional journalistic standards,
  9. Retirement savings gone,
  10. Severance package financing dream,
  11. Sold during time of psychological vulnerability, especially unemployment,
  12. Sold only to people with no small business experience (very naïve),
  13. Success or failure is within the direct control of the individual franchisee,
  14. Unproven business model,
  15. Unskilled and unaware of risks, and
  16. Who pays for the research?

Many families are going through very desperate times and are searching for help.

  • This article is just plain cruel.

I collected the already-published documents to give a sense of history for new investors.

WikiFranchise.org is a revolutionary tool for those willing to use it.

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

January 12, 2009

veroniquedereymercatuscentre1Private 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


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