How I Figured Out SBA Liar Loans

…first year average gross revenues for new sites in 2006 and 2007. No one picked up on it. The numbers? It was roughly $249,000 in 2006 and $262,000 in 2007. Nowhere near the $500,000+ we had on our projections. At this point I needed to understand WHY. Why were we given the inflated numbers and not the real numbers.

Blue MauMau
September 22, 2011

How I Figured Out SBA Liar Loans
John Rich

John%20Rich.jpg

Remember mortgage liar loans that largely benefited the lenders who took their fees out early? The loans later collapsed. For franchise owners, there is something similar called SBA liar loans. I was set up from the beginning with a loan that would fail, supported by tax payers. This is how I figured it out.

I became friendly with new franchisees I attended training with in New Jersey. Afterwards, I remained in contact and after they opened I kept hearing the same story - none of them were making money and we were all pouring additional cash into these sites. Since we were not told to expect to place additional capital into these things after maybe the first three months we were all hurting. After a year or so of this and hearing the same negative cash flow comments I started researching. One of us failing I could understand, two OK, three maybe - ALL OF US (about 12 just from my little group)? No way. I knew something was wrong and, yet, I was the only one calling around to compile these stories.

So I started digging into the contract and, now understanding what some of these passages meant from a legal sense with regard to the particulars of the business, I knew we were screwed. Not to mean that I knew we were all defrauded, rather, I realized the contract truly gave them the right to do anything to us and nothing for us. But if everyone was experiencing the same thing I also knew there had to be a connection and I needed it to be something outside of the contract. While, yes, the General Release did actually state that even if we found they committed fraud against us we would be unable to sue them, I still felt there was something else missing.

Everyone spoke of the advertising. Everyone spoke of the high cost of the rents and personnel. But I knew all that was covered under the franchise agreement AND that these complaints centered on what happens AFTER opening. But how did they snake us into buying BEFORE we opened? What was that one bit that enabled them to snare us all in? After pouring over the Franchise Agreement for months, calling all different franchisees around the country and trying to find that one link it was a phone call - a weekly one I had with a very good and trusted franchisee friend, where it all came together. It was a Saturday in either mid/late July or early August 2008 between 2 and 4 in the afternoon I was driving home and on my cell with my friend. We were still talking while I pulled into the driveway. Since my cell doesn't work in the house I was pacing on the driveway while talking. The sun was shining - it was a beautiful afternoon. Then he said one sentence: "You know what really pisses me off (my name)? That I didn't even come close to hitting my first year $500,000 projection."

At that moment, and I will never forget it, everything went still.

I remember not hearing a single sound. I remember feeling as if the sun was only shining on me. (Believe me, I realize it sounds crazy but it's the truth.) My mind started racing like a computer does when performing multiple calculations, it was like a blur, all the dots started connecting and nothing else was going to get in the way. I excitedly asked him if he will be able to speak with me in 10-15 minutes and I would call him back. He asked why and I responded "I think I've got something". I ran into the house, started up my computer and looked at my business plan - also a $500,000 first year projection. Here we were in different parts of the country with completely different demographics and yet, I had the same numbers - how could that be? I called him back and asked for his business plan. He asked why and I remember responding "You don't want to know. Just send it". He did. The pieces started to fall into place. We were both sent by Huntington Learning Center franchise salespeople to this one loan consultant. We were told she had all the numbers and has worked with Huntington franchisees for years.

I then contacted another franchisee friend. This one was in a completely different region of the country than either of the two of us. I asked for his business plan, he asked why and again I responded he doesn't want to know. He sent it. Different demographics than my friend's and mine, YET the same numbers. That's when I started to call around and on almost every conversation I heard the same thing: 'I was sent by Huntington to (loan consultant) and was told they had all the numbers'.

From there I now had to determine what the ACTUAL numbers should have been. Huntington stupidly printed them in ONE (and only one that I have been able to determine) monthly newsletter - February 2008. You don't see the newsletters prior to signing and this one was printed 18 months after we all signed so we would never have known. In that edition they broke out first year average gross revenues for new sites in 2006 and 2007. No one picked up on it. The numbers? It was roughly $249,000 in 2006 and $262,000 in 2007. Nowhere near the $500,000+ we had on our projections. At this point I needed to understand WHY. Why were we given the inflated numbers and not the real numbers. It boiled down to two reasons:

  1. Had we known the average franchisee LOSES over $100,000 in the first year NONE of us would have bought in. These were supposed to be "proven business models". The only thing "proven" was that they didn't work.
  2. I found out that the SBA, even though it realizes it is lending (guaranteeing) to borrowers that are a greater credit risk, they STILL have lending requirements - such as, the business must throw off a net cash flow equal to or greater than a set debt coverage ratio in order for the loan to be approved. In other words (and this is from the SBA's Standard Operating Procedures) the business MUST be able to pay off the loan through the cash flow of the business (after adjusting for paying the franchisee a set salary as well).

It was clear we were all set up. Huntington knew the revenues generated from their business does not meet SBA standards so we were all given numbers that were purposely skewed in order to get us the loan and for Huntington to make a franchise sale.

COMMENTS|

1. And Al GORE INVENTED the INTERNET!
Big Tex

It looks like the learning center had a one stop shop to cart you franchisees throught the SBA process. I found a picture of some of the Learning Center Franchisees (salesman on side with helmet). Whoopie!

Richard has known of this issue for a number of years. His article is excellent. The problem is the BOOBerment doesn't care. The Socialized Business Administration (SBA) is just in the politics of distributing money. Remember we are dealing with the government, and these people are not managing "real" money. It's taxpayer money, and as long as you mortgage up to your eyeballs to secure the loan, hey, it's all good. Shhhh!

You just got caught up in this machine that started back in the 60s.You evidentially discovered that your franchiser was using cookie cutter business plans to help franchisee's obtain loans, but this just shows that you and the other franchisees never performed due diligence AND just how incompetent BOOBerment is. Want a $12 muffin or $8 coffee?

Janet Spark's article from 2008.
http://www.bluemaumau.org/node/6132/talk

Richard Solomon's article from 2008.
http://www.bluemaumau.org/the_complicit_loan_broker_in_franchise_fraud

Dr. Michael Webster brought up the RICO angle, since it covers a case of non reliance, over 3 years ago:
http://www.bluemaumau.org/rico_actions_reliance_and_franchisee_lawsuits

2. Acknowledgerment is in order. OldWad is correct when he says
RichardSolomon

that I got a lot of information about the issues from him and another HLC ex franchisee who was then my client.

OldWad is no closer to being perfect than the rest of us. So what. He has been the moving force behind the exposure that this pervasive scam has now been receiving.

I suggest it might be a lot more helpful to disregard his imperfections and pay attention to the problem. Some of you manage to disregard my imperfections from time to time. If you can cut me some slack every now and then you can do the same for him. Y'all aint hittin no home runs neither from what I can tell.

3. Slight difference, you seem
Guest

Slight difference, you seem to dwell in reality while oldsword still contends he was an innocent little victim in all this when it is obvious he was trying to rig the system and simply got taken by a better crook. It is hard to feel sorry when a thief is taken by a con man. I bet the attacks on him would end if he would simply admit he was trying to gin the system and got trapped in his won web of deceit.

4. Crook?
R&D
"Slight difference, you seem to dwell in reality while oldsword still contends he was an innocent little victim in all this when it is obvious he was trying to rig the system and simply got taken by a better crook. It is hard to feel sorry when a thief is taken by a con man."

OS is not and never has been a Crook. What I love about this post is that you actually admit that Huntington was a CROOK!

5. Huntington's Reputation !
Guest

It speaks for itself.

6. What the heck does a learning center franchise bring of value?
Guest

Why would this concept need to be franchised? Why not just open a privately owned learning center and hire a consultant? I don't get it. Sounds like a dumb thing to pay a franchise fee for It's not like you gain economies of scale or even brand name recognition? In my tri state area there is only 5 locations. Where is the national advertising?No value. Stupid thing to pay a franchise fee for.

7. Webster - read my response
FuwaFuwaUsagi

In all seriousness, I came to the conclusion years ago that many people play psychological games with themselves. The good Barrister Webster may have additional insight as this is his area of expertise. But my observation is often people want to create an outward appearance of trying, but inwardly they are afraid of not so much failure but what a failure would say about them to others (in other words they really doubt they themselves can succeed). In order to accommodate this conflict they each to franchising. The instantly gain the credibility of having tried, but also someone to lay the blame on if they fail, and I think in many instances that is what the motivation is. Often Barrister Webster mentions that many people felt the deal was wrong or that they would fail but went ahead with the purchase anyway. I suspect part of this is the desire to have a scapegoat so they can blame others in the event of their failure.

So why any me too concept or one that does not need a franchise – one thought is it provides a ready made excuse for failure and allows the would be franchisee zee to exonerate themselves of responsibility.

8. Dealing with Risk
michael webster

Fuwa, our perceptive rugged individualist, states:"But my observation is often people want to create an outward appearance of trying, but inwardly they are afraid of not so much failure but what a failure would say about them to others (in other words they really doubt they themselves can succeed). "

Yes, the evidence from a large body of psychological literature suggests that people who attempt to minimize the real uncertainty in the business world by seeking false or fake guarantees are high risk fraud candidates.

Many individuals need, even the appearance of, certainty to function - witness the inane and sometimes illegal lengths corporations will go to smooth earnings to meet Wall Street's 'expectations'. Everyone understands that this is nonsense, but goes along with it because they fear the investor who flees from radical uncertainty.

In franchising, the terms used to minimize radical uncertainty are "turnkey", "proven business model", etc.

The irony is, of course, you want to select for those individual who can both be interdependent and face radical uncertainty without requiring false guarantees.

9. Seriously?
Ray Borradale

The instantly gain the credibility of having tried, but also someone to lay the blame on if they fail, and I think in many instances that is what the motivation is. FUWA

Seriously Fuwa; it might be time to change hands.

10. when you spend much time here it's hard not to be
Guest

Biased in that direction. Very few failures here accept ANY responsibility for themselves. It is ALWAYS someone else's fault.

11. I second that
Guest

It is clear that Oldsaw conspired with the Loan broker to commit bank fraud. When a franchiser is recommending a loan broker they are going to do whatever they can to keep that recommendation in order to make money. To rely on a loan broker to perform your due diligence is just STUPID. Instead of OS admitting he was stupid, he continues to try to prove how smart he is and how elaborate this "con job" was. It's simple to many of the rest of us how stupid he was. Stupid is as Stupid does.

12. Does anyone know what
Guest

Does anyone know what oldsword did before he got involved in franchise fraud? It would be interesting to see if he was a banker or involved in wallstreet or finance somehow. There is something about this that does not add up. Hey oldsword what did you do before becoming a franchisee?

13. I heard he..
Guest

Ran a hair club for men.

14. The more I think of this the
Guest

The more I think of this the more this seems right. Oldsword does not come across as a mechanic who saved up some money, or a carpenter who wanted a sideline, or a retail type. But if he was a sales type he would never have gotten involved in this, it did not offer enough of a pay-off. My guess a back office financial type, maybe Wallstreet or banking, or even corporate purchasing. He probably saw himself working part-time or 9-5 and home early and thought he was smarter than everyone else because he purchased the good life on the backs of everyone else – well with just a little fraud to help it all along. They key thing is, his background is what made him think he could get way with it. The Feds should consider that when they sentence him.

http://www.bluemaumau.org/how_i_figured_out_sba_liar_loans


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