Most people don’t realize they’ve been sold a balloon full of hot air with “franchise” written all over it until it’s too late. People who tend to gravitate towards the thought of owning a franchise are usually in a state of transition. They have either retired from a successful life or they’ve been dumped by the man we call corporate America. It’s not expected that they would understand the process or even ask the right questions to get to the core of how franchises deal the paper. So for those of you out there who are reading this and haven’t yet been conned into a crooked franchise, read on, you’ll be glad you did. For those of you who might be victims, hopefully this will give you some ammo to pursue the crooks who took your money!
Franchisors tend to use brokers. Take this broker, Total Lease Concepts in Los Osos, CA run by a very colorful fellow named R. B. Kluttz. R. B. has addresses all over the country. He has businesses all over the country. In fact, he seems to operate as a broker, as an owner, as a leasing company and a 401K rollover company all in one. He runs offices for his 401K rollover company inside the same address and suite as a recruitment franchise. (No one even knows if he has any employees at this location.)
R.B. has figured out that he can sell mom and pop a hot air franchise by convincing them to rollover their 401K into a corporation, then bundle a couple of cheap computers and office furniture into a capital equipment lease (though only 5% of the deal is actual equipment). Then he takes a big down payment for his commission (taking payment under another corporation of course) and voila! Mom and pop have a worthless franchise, R. B. has a pocket full of cash and R. B. is on to the next mark. But it doesn’t stop there!
You see, there’s a method to the madness. R. B. knows this is questionable dealing, but he has friends in this grand scheme. They are known as capital equipment leasing companies. Most of them are small little shops that operate under various names with little to no regulation by anyone. They change their names a lot and there isn’t a broker or franchisor they won’t sit and have dinner with to try and figure out how they can share in the booty of shady dealing!
Stage 2: R. B. never executes any of the disclosure documents that might cause harm to him, in fact he simply forgets to return them to the franchisee and only attaches the capital equipment contract to the few non-incriminating docs and then he calls up his friends at Frontier Leasing and sells them the paper! Now most people might think this is just another form of securitization, but in essence, they are all in bed together. (See the attached link in pdf format of the legal decision in Frontier’s home state) It looks sort of like this:
Franchise Fee was originally stated to be 79K. R. B. adds equipment and other ancillary stuff to it to get it into a ‘capital equipment contract’.
R. B. – charges $15,000 down payment which he puts in his pocket
R. B. – (Because the paper is in the form of a lease and perceived to be UCC 2a compliant, R.B. can charge any amount of interest). He uses the 79K number minus the downpayment, charges between 20-40% and puts a monthly number of say, $2000.00 per month. He then sells the paper to Frontier Leasing for say – $20,000!
R.B. – is now free of the paper, has 20K which he passes on to the Franchisor (in the case below – MRI). So now you know what the real value of the franchise is! R. B. then is free to go and the relationship now is in the hands of Frontier Leasing.
Frontier Leasing: These guys are great financiers (NOT). They have been named in multiple instances of leasing of fraudulent schemes including “Royal Links”, Norvergence, CCC (ATM fraud) and various other scams having to do with small mom and pops being bilked. So Frontier now is taking 2K per month out of the franchisee’s account, with sales tax for the entire falsified fee. They then bring in an insurance partner to charge for $70K worth of computer equipment! (Remember that the deal was primarily the franchise and the computers were thrown in just to get it into a capital equipment lease so they can charge massive amounts of interest, state sales tax, insurance on the equipment and falsify the actual amount of the transaction.) The unknowing franchisee doesn’t want to have their livelihood so they go along with the scam. After all, they are honest and they really do believe that they can make a go of it.
18 months goes by, the franchisee isn’t making any money, the whole thing is beginning to stink to high heaven. The franchisee has been doing everything the franchisor directed them to do to make a legitimate go of it to no avail. His bank account is now approaching empty and he’s depleted his entire life savings on the promise of the franchisor that the business will come around. (The franchisor is always upbeat because he isn’t trying to make a go of the business that he is selling, he’s selling more blokes down the river and he’s ecstatic!) And because he hides behind disclaimers and disclosures keeping you from blaming him for anything with terms like “good faith” and “non-disparaging”.
Each time the franchisee calls up the franchisor for advice on the payments or on the communications with the leasing company Frontier, the franchisor tells them that they have to take that up with the leasing company. It’s out of their hands.
Frontier Leasing: Now that 18 months have passed, Frontier has made their 20K back, and they now have 36k in collections along with state tax monies on the entire amount (illegal don’t you think?). I wonder if the state tax collectors in each state even know Frontier Leasing by name or have ever received a nickel from them in taxes collected? IT’S TIME TO SELL THE PAPER TO ANOTHER UNDESIRABLE LEASING FIRM! In captial equipment leases, once the paper is sold, Frontier is OFF THE HOOK! (If it were a true finance lease and crooked, then Frontier could not sell its way out of the usury liability, but because it’s disguised, they can and the average court and the average lawyer doesn’t even recognize what is going on!) The UCC code 2a is often incorrectly applied because of its “Hell/High Water” clause stating that once it is signed, you cannot back out.
And the scam continues and continues and continues with the leasing companies laughing all the way to the bank. Search on “Royal Links” and Norvergence and “CCC ATM” and you’ll read numerous cases where the little guy loses in courts all over the country. Wake up America, your last and only liquidity, your life savings is disappearing. Note the quotes from the just appointed baby-face of one of the 401K rollover firms, Guidant Financial (after his firm is pulling out due to investigations by the IRS):
“What we specialize in is franchises from $20,000 to $250,000 in startup costs. Those are the very, very small mom and pop franchise units that can be launched by hiring minimal employees and capital equipment. These types are very strong utilizers of Guidant’s services.”
“Guidant’s leadership feels it is the perfect time for a product like this. We literally have trillions of dollars in retirement savings. Even with the hit that retirement savings have taken with the overall economy, and the Dow Jones and NASDAQ, you still have trillions of dollars.” – Stephan Roche February 2009
http://www.bluemaumau.org/6884/interview_with_guidant_financials_ceo_stephan_roche
http://caselaw.lp.findlaw.com/data2/iowastatecases/app/8-465.pdf
Bloody Franchise 