Experimac aka Experimax franchise SBA-guaranteed loans, which we’ve reported have an unusually high and growing default rate, are being investigated by Nevada Senator Catherine Cortez Mastro. Senator Mastro sent a letter to Acting Administrator of the Small Business Administration (SBA) regarding the Experimac franchise as well as Complete Nutrition, Dickey’s Barbecue Pit, and Subway.
(UnhappyFranchisee.Com) Nevada Senator Catherine Cortez Mastro is investigating complaints against four franchise organizations whose franchisees obtained loans guaranteed by the Small Business Administration (SBA).
Critics contend that some of these banks knowingly approve applications with fraudulent and unrealistic financial projections for unproven or high-failure franchises, knowing that the defaulted loans will be repaid with taxpayer (SBA). Some brokers allegedly reap high profits from upfront fees and banks increase their returns selling these guaranteed loans on the secondary market.
While the franchisor and the banks get paid, the failed franchisee often loses his or her assets and is pursued by the Department of Treasury for the debt plus penalties & fees.
We’ve reported that the Experimac franchise (now called the Experimax franchise) opportunity promoted & sold by West Palm Beach United Franchise Group (UFG) has an especially troubling, assembly-line funding program that is resulting in an alarmingly high number of franchisee defaults. Paul Bosely, the broker who claims to have processed more than 70 Experimac loans, referred to the process as “The McDonald’s of Loans.” (EXPERIMAC, UFG Franchise Funding Trap: The Paul Bosley Interview)
Senator Mastro’s Letter to the SBA re: Experimac Franchise Loans
Senator Mastro’s letter begins:
Dear Acting Administrator Pilkerton:
I write to request information regarding Small Business Administration (SBA) guaranteed loans to four franchises. In recent months, my staff have heard about problems with Complete Nutrition, Dickey’s Barbecue, Experimac and Subway from franchisee owners who have SBA guaranteed loans and are having trouble with the franchisor. These problems reported by Nevada business owners are similar to that of other franchisees across the nation…
The Nevada Senator includes a brief synopsis of each of the four franchise companies. Of Experimac, she writes:
Between January 2010 and September 2018, SBA recorded 63 loans to Experimac franchisees. A number of these franchisees feel the estimated revenue provided by Experimac was inaccurate and that they have never earned the revenue reported as typical.
Experimac also required franchisees spend $130,000 to design the store and buy the supplies.
SBA guaranteed 63 loans to Experimac franchisees, of which 86% were made by Celtic Bank. Celtic Bank quickly sold them to investors.
To date, at least 23% of these loans have failed. All the charged off loans, and nearly all the loans (54 loans or 86% of all loans) were financed by Celtic Bank Corporation, based out of Salt Lake City, Utah.
In addition, Experimac was sued by Apple for patent violations, i.e. “Mac” without telling franchisees of the lawsuit threat.
While Senator Mastro has not (yet) called for a full investigation, she has requested detailed information about the process with which SBA franchise loans are granted, and specific, detailed information about the loans granted to franchisees of the four franchise brands in question:
I would like to inform my constituents of the resources SBA can provide to help them avoid default.
I would also like to ensure other franchisees do not receive government-guaranteed loans for franchises with a history of complaints about unfair and deceptive practices.
Therefore, I request the following information:
1) How is the SBA working with franchisees with SBA loans when a franchisee runs into trouble?
a. Specifically, when the SBA notices high rates of defaults in a franchise, what action does your staff take to prevent loan failures?
b. If there is a major change in an agreement, like those that occurred with Complete Nutrition, Subway or Dickey’s Barbecue, what recourse does the SBA have to prevent loan failures?
c. How does SBA review ownership changes and what can SBA do when such changes have the potential to harm the revenue of franchisees with existing SBA loans?
d. Regarding Complete Nutrition, what can SBA do when a franchisor terminates the franchise agreement entirely? Does Complete Nutrition have affiliated brands seeking
SBA-guaranteed loans? If so, what are the other brands?
e. Are there examples of other SBA-guaranteed franchisors making similar decisions as the one Complete Nutrition made to stop being a franchise? If so, how were the franchisees compensated? Did the franchisor make payments on outstanding loans of the franchisees?
f. Can the SBA exclude a brand if there are significant problems with one of the franchises in its portfolio? Has the SBA stopped loan guarantees to one brand because of problems in a franchise within its portfolio? If so, which franchise brands and franchise owners and when?
2) How many total loans did SBA make to the four mentioned franchises over the past six years — 2013-2019? Please break out the loans by year and state.
3) How many of the four franchises have loans that defaulted? How soon after the loan closed were those loans charged off? Please break out this information by year and state.
4) How many of the four franchises mentioned are behind in their loans but are not listed as defaulting yet? How soon after the loan closed were those loans charged off? Please break out this information by year and state.
5) What information on revenue, defaults and store closings does the SBA require franchisors to provide to franchisees seeking SBA-guaranteed financing? Is that information provided within the Financial Disclosure Document?
While the outcome and significance of Senator Mastro’s inquiry is not yet clear, we applaud what is hopefully the first step toward investigating and addressing the problems with the SBA guaranteed franchise loan program.
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