Dicey Doug Ducey’s ‘default’ flavor ice cream

The Arizona Republic’s Political Insider column today had this tidbit on Dicey Doug Ducey’s experience as a purveyor of the American dream selling franchises:

ice creamWSJ riding to DuVal’s aid? … The Wall Street Journal penned an article last week examining franchise businesses with higher-than-average default rates.

Named on the list? Cold Stone Creamery, the ice cream company that Ducey once led. While he continues to tout the company’s success to voters, the Journal’s analysis found Cold Stone ranked among the 10 worst franchise brands when it came to Small Business Administration loan defaults.

The companies whose franchisees had the highest failure rates on SBA loans from 2004 through 2013, according to the WSJ: Planet Beach, Huntington Learning Centers, Quiznos, Cold Stone, Aamco Transmissions, Curves International, Cici’s Pizza, Minuteman Press, Sylvan Learning and Cartridge World.

The Journal’s analysis of SBA-guaranteed franchise loans found Cold Stone charge-offs during that time period were $34.1 million — and a 29.4 percent default rate. Ducey led the company during part of that time.

Cold Stone’s owner blamed the recession and “extreme growth that occurred in the years immediately preceding the downturn.”

“Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-baked franchise loans in the past decade,” the story said. “Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21 percent of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013.”

Here is the WSJ article to which The Republic did not link in its report, Brands With Higher-Than-Average Default Rates:

Quiznos, Cold Stone Creamery, Planet Beach Franchising and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of Small Business Administration loan defaults.

Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-backed franchise loans in the past decade.

Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013.

WSJ

An SBA spokesman declined to comment on the Journal’s analysis of the agency’s franchise loan data, which the Journal gained access to via the Freedom of Information Act. He said the agency’s loan data is incomplete because some lenders don’t indicate if a loan is for a franchise or for which chain when seeking the agency’s backing.

* * *

The SBA guaranteed nearly $18 billion in 7(a) loans, including $2 billion for franchisees, in the fiscal year ended Sept. 30, 2013. Overall, 18% of all SBA 7(a) loans—and 13% of all such loans to franchisees—were charged off, based on The Journal’s analysis of the data from 2004 through 2013.

Most recently, charge-offs on SBA 7(a) loans have been declining. Last fiscal year, 8,100 such loans were charged off for a total of $705 million, down from nearly $2 billion charged off in 2010, the Journal’s analysis shows. Simultaneously, the $18 billion loaned in fiscal 2013 was the second highest year in total amount approved in the past decade, according to the SBA.

Most of the franchise brands with the highest default rates in the ranking blamed the economic crisis, at least in part, even as some expressed doubts about the SBA data. In addition, the brands said they have improved the support they provide franchisees and in some cases tightened the criteria for franchise buyers.

* * *

Cold Stone owner Kahala Franchising LLC said the problems caused by the recession were compounded by the “extreme growth” that occurred in the years immediately preceding the downturn. [Doug Ducey’s excuse for when he owned the company.]

* * *

The Journal limited its analysis to chains whose franchisees took out a total of 100 or more SBA 7(a) loans from 2004 through 2013.

* * *

Franchisees can struggle to repay SBA or other loans for myriad reasons, including changes in consumer tastes, costly industry regulation or a weak overall economic climate, as well as bad decisions on location or marketing. But some also blame the parent franchise companies for providing insufficient training or ongoing support and for charging excessive startup or operational fees.

The SBA collects fees from lenders making the loans it backs. It sets the fees at levels it hopes will cover projected loan defaults. When defaults are higher than it expected, it may ask Congress for a subsidy, as it did in each of its four most recent fiscal years.

snakeoilSo here is how it works: Dicey Doug Ducey sells the American dream to some schmuck hoping to make money from a Cold Stone ice cream business. He gets the franchise fee up front, and a percentage of the income under the franchise agreement for use of the franchise name and products. The schmuck takes out an SBA loan because most small business owners do not have enough capital to cover the operating costs of a start-up business for the first three years. The business does not do as well as advertised by Dicey Doug Ducey, and eventually the business fails. The schmuck defaults on the SBA loan (and files bankruptcy) because the schmuck has lost everything he or she had in life chasing after the American dream.

The only one who made any money on this deal was Dicey Doug Ducey and Cold Stone. And you, the American taxpayer, get to clean up his mess by subsidizing (bailout) the SBA loan defaults by his franchisees with your tax dollars. What a swell guy!

Dicey Doug Ducey talks a lot about shrinking the size of government and running it like his Cold Stone business.  You have been fairly warned voters.

h/t Ice Cream Truck graphic: beatofthedrum.buzznet.com