Franchising is HOT!

Thanks to Sean Kelly (naivete does have its upsides) for letting us know about people like Ms Church:

“Attorney Linda Church, formerly of The Scott Kern Law Office in Connecticut, has joined fledgling franchisor The Spy Place Franchising, LLC, as General Counsel.

Sean questions whether a franchisor who has only one location actually needs an attorney? 

Bloody’s response:  Come on Sean. You’re not fooling anyone here. Everyone knows that an attorney with her knowledge of one-sided franchisor-friendly UFOCs/FDDs and contracts is essential for a successful franchise today! It just proves that Ray Huck (aka Hukster) of the Spy Place is yet another predatory opportunist who knows he must build everything and anything into those contracts to screw the franchisees. The fact that Church was in dispute resolution gives Huck all the insider experience needed to eff over the franchisees.

The only people a franchisor needs today on staff is a dishonest, slick and smooth sales force, an in-house lawyer with all of the franchisor tricks in her bag (working with DeLuca gives here more litigation experience than the top 5 franchisors combined) and a gullible broker (a guy like Sean) to promote their snake oil.  Add a PR person to tell the world how successful franchising and especially the franchisor has been and is (they could also hire you for this Sean) and voila – you’re a franchisor.  Sit back and collect the royalties, the franchise fees, spend the franchisees money on advertising (and get to go to Nascar and PGA events) and when the franchisee gets pissed off, they have to go to detention (otherwise known as arbitration).  This too is controlled by vendors who cater to the franchisor.  And when you learn that the franchisor is the master and you are the slave, you can come out, broke!  

In these times in this economy, there’s so much blood in the water you could walk on water just by stepping on the heads of the blokes who are out of work and just waiting to give you franchise hawkers their life savings so you can party on “their” retirement. After all, America is the land of fropportunity!

Be careful prospective franchisees!  Franchising ain’t never been good and it’s more perilous today than ever before!  Don’t believe those lawyers who tell you to do your due diligence before buying a franchise.  They are after your money too!  Ever hear that seeking advice should be from those who are not in line to benefit?  A recent paper published by a German PhD by the name of Georg Spranger used a great animal analogy to desribe franchise organizations.  I’ll go one step further and declare that the Tuna are the franchisors and the dolphin are the brokers:  

Out in the world’s oceans, tunas and dolphins initially compete for food. As they hunt for smaller fish, tunas encircle their targets and then attack right towards the center. Breaks in the circle though regularly allow many prey to escape. Because of their ability to communicate, dolphins on the other hand are more efficient hunters, though smaller group sizes permit to attack only smaller swarms of fish. Stunningly now, tunas and dolphins frequently join each other for hunting, thereby combining their individual strengths and alleviating initially existent weaknesses. While the mass of tunas does the ground work, the fewer dolphins coordinate the armada and close the breaks in the circle.

Anyone giving advice on the products/services they sell cannot be trusted.  Why is it that prospective franchisees trust some of the most disreputable people in the world with their livelihoods (Lawyers, franchisors, franchise brokers)?  Probably why  Harold Brown entitled his book “Franchising; Trap for the Trusting”  back in 1970.   “Wake up people!  The world doesn’t work on statistics and due diligence when it’s among thieves!  If you are one franchisee and you don’t make it, you will become a statistic under the column “Poor House”.  YOU’RE RUINED – DID THE STATISTICS DO YOU ANY GOOD?  Go find a franchisee that’s lost their life savings, their home, their health and perhaps their spouse and family, and discover that due diligence has to start with the failures, not the gypsy selling the service! And take the advice of failed franchisees who have lost everything:  RUN FOR THE EXITS!  FRANCHISING IS ON FIRE AND YOU’RE THE FUEL!

Sincerely,

Bloody

Fly On the Wall – with a Franchisor, Franchise Broker & a Predatory Lender’s Attorney

Portions of the following story might be fictional, though the actions of the parties suggest not.  The last names have been removed to protect franchisees, and not the guilty parties (leasing companies, brokers & franchisors) who have worked this plan for many many years.

R.B. – Glen, I’ve got a great new way to finance new franchises.  Let me show you something?

Glen – Sure R.B.

R.B. – You know how difficult it is to get financing for people from traditional lending institutions.  But there are leasing companies all over the country who are desperate to place their money.

Glen – Go on…

R.B. Well, if we package a bunch of stuff along with the franchise fee, we can write up a lease contract and get money from the leasing companies in minutes.

Glen – But how will that work?  How do we get our money?

R.B. – I brought along a friend who represents some leasing companies in the Midwest, meed “Ed”

Ed – Hi Glen.

Glen – So tell me more Ed.

Ed – It’s quite simple.  R. B. can write up an equipment lease contract with a hell/high water clause (essentially uncancelable and with no usury limits on interest) and the franchisee signs as financing for the package.  It consists of the franchise fee, some computer equipment and furniture and geographic protection fees.

R.B. – So I’ll write up the contract with Ed’s guidance.  The down payment in cash will be my commission.  Then I’ll sell the paper to Ed’s client for a discounted fee (this money going to you Glen).  The interest rate will allow Ed’s client to double his money in approximately 18 months.  In addition, they’ll be able to charge insurance fees on the equipment.  The leasing company paper work will allow them to force the franchisees into insuring the full lease rate because there is no breakdown as to the equipment portion of the lease.  This creates another windfall for all parties.

Glen – So R. B., you get your money from the down payment, we get our money from the sale of the paper to Ed’s client and then Ed’s client gets his money back in 18 months or so?  What happens then?

Ed – Well, my client will then sell the paper to another leasing company.  They’ll buy the paper for say, 20 cents on the dollar which will give us all another windfall and we can split that up three ways.  The new leasing company will then own the relationship and with the UCC 2A code, there is little to no risk of retribution.  The franchisees are too naive to dig any deeper than the reality of the fact they signed the lease and the hell/high water clause is final.  In addition, they are not resourceful enough to seek out a franchise-savvy lawyer to take any action.  There are summary judgments all over the country in favor of the leasing companies supporting this.

Glen – But R.B., I want my money at the outset, not later.  How can you guarantee me this?

R.B. – We have multiple leasing companies in multiple states.  The contracts move the venues around to states that are favorable to our side of the argument.  The paper is sold before the trainees even leave the building.  They’ll never know.

Ed – And because any action they take has to happen in the state of the leasing company, my backyard, they haven’t got a chance.  First of all, most never know about any actions, and by the time the leasing company that owns the paper takes action, they’re usually down and out and the judgment is unchallenged due to cost of defense.

Glen – So how do we lose?

R.B. – We don’t.  There isn’t any way to lose.  They cannot afford to defend themselves, the trail is muddy and we all get our money within 18 months and then we sell the paper.  Decisions all over the board and the fact that every franchisee has to fight his own battle all keep us from losing even if one of them decides to take action.

Ed – R.B. is right.  There is little to no risk as the people who are doing the signing don’t have the business acumen to figure out what has happened until it’s too late.

Glen – I like it.  One question though, how are they going to pay the lease after all the ink is dry?

R.B. – I got that covered.  I get them into a 401k rollover plan called ROBS which pulls all of their money into their corporation and this is the money they pay the lease with.

Glen – Can this be traced back to us?

R.B. – I don’t think so.  We’re getting paid with their downpayment monies and the sale of the paper to the leasing company.  They they’re on their own to figure out what the IRS will do to them.  We’ve been paid and given them all the paper work required to do the rollover.

R.B. – So what’s the actual franchise fee for the package Glen?

Glen – Oh, around 22K

R.B. – And the protection fee?

Glen – 7K

R.B. – So package in the deal 5 computers, a phone system and some furniture, some software and services, territory protection fees and we’ll write the paper for 100K or so.  We can charge them 15k downpayment which goes to me, sell the paper to Ed’s client for 25K (goes to Glen for the franchise fees) and we’re off!

Glen – You get 15K, we get our 25K and with about 18 months of payments, Ed’s client gets around 40K?

R.B. – Yep. And then we sell the paper in 18 months for 36K more and we’ll split that three ways for another 12K apiece.  The leasing company that buys the paper will still have 42 months of 2K payments or 84K for their 36K investment.  Nice profit eh?

Glen – I like it, but what are the potential risks, Ed?

Ed – Well, the UCC 2A argument is rarely uncovered and most judges rule in favor of the leasing company.  But as you know, there is always a risk of the UCC being thrown out as unconscionable or not applicable because only a small portion of the lease is actual equipment.  If a franchisee figures this out and argues it on the face that its not an equipment lease, but a finance lease, then the contract could be deemed illegal, subject to usury or perhaps other types of decisions we’ve yet to see.

Glen – I’m in.  If it comes up, we can deal with it as it happens.  History tells us that the courts are on our side.

R.B. – I’m definitely in

Ed – As long as you isolate the franchisees, there won’t be any problems on my end.  We’re in.