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.
Bloody Franchise 