Bloomberg on Dicey Doug Ducey’s ‘default’ flavored ice cream

BritannyThe Arizona Republic’s Robert Robb recently did his best impression of “Leave Brittany alone!” in Hey Ducey critics, lay off the ice cream.

Luckily, Bloomberg Businessweek ignored George Will’s mini-me. The Government Keeps Helping People Buy Failing Cold Cold Stone Creamerys:

Would you loan someone money to buy a Cold Stone Creamery franchise if you knew that more than a quarter of those loans default? If you’re the U.S. government, the answer is yes.

Over the last decade, franchisees in the Cold Stone Creamery ice cream chain defaulted on 29 percent of working-capital loans backed by the government, costing taxpayers tens of millions of dollars, according to an analysis of Small Business Administration data published by the Wall Street Journal last week.

The franchising model offers would-be entrepreneurs the promise of a business in a box. Pony up some cash and get an established brand. Follow the franchisor’s instructions for running the business and sales should blossom—except when they don’t.

ice creamCold Stone and Quiznos didn’t account for the worst failure rates, but their franchisees left taxpayers holding the biggest bills, with more than $72 million in charged-off loans between the two chains. Both brands remain eligible for SBA-backed loans, according to the website Franchise Registry.

Michael Serruya, chief executive officer at Kahala Brands, which owns Cold Stone, says in an emailed statement that the chain’s default rate was caused by “extreme growth” in the years leading up to the recession. [When Doug Ducey still owned it.]

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Why does Uncle Sam keep guaranteeing loans for franchises that so often go bad? The agency’s inspector general found little attention paid to default rates in a report (PDF) last year: “The SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks,” the watchdog reported. That lax oversight makes the government partly responsible for allowing people to invest in risky franchises, says Keith Miller, chairman of the Coalition of Franchise Associations, a franchisee group: “Banks wouldn’t have made the loans if it wasn’t for the guarantee.”

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It’s also true that no one forces franchisees to take out loans. Why would anyone buy into franchise systems with such high default rates?

Buyers may fail to do enough due diligence, and the law doesn’t require franchisors to share a lot of information that might help them. For example, franchisors don’t have to disclose default rates or average first-year store revenues with potential franchisees.

Nor does the SBA publicize the data. The Journal had to file a Freedom of Information Act request to get it. A handful of websites highlight chains with records for poor performance, but those watchdogs’ warnings can be hard to find.

Meanwhile, chains have a lot of incentives to sell new franchises. Franchisors themselves get upfront payments for selling new units, as well as a share of franchisees’ revenue. If a store goes bust, the franchisor can resell the license and collect a new fee. Beyond the franchisors themselves, there are a bevy of consultants and brokers who talk up the franchising model, for a price. Banks also profit from selling the franchising model—especially since the SBA limits lenders’ downside by guaranteeing as much as 85 percent of loans that go bad.

Dicey Doug Ducey likes to say he will run Arizona like he ran his business. He is a snake oil salesman selling his product to unsuspecting people who don’t know any better, and sticking them with business failure and personal bankruptcy. This con man gets paid up front and takes his cut, and when  his “marks” fail they get some relief by being bailed out by the federal government at taxpayer expense.

Only Dicey Doug Ducey’s business model is not how a government operates. State government can’t file bankruptcy, and the federal government isn’t coming to bail out his fool ideas. Arizonans will get stuck with financial ruin and an economic catastrophe. We have seen what this plan has done in the meth lab of democracy in Kansas over the past four years in a real life example. Don’t make the mistake of buying Dicey Doug Ducey’s ‘default’ flavor ice cream.

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

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