Cortez Masto seeks loan transparency for would-be franchise owners

WASHINGTON — Legislation to stop predatory practices in the franchise industry and greater transparency in the Small Business Administration’s guaranteed loan process is being readied by Nevada Sen. Catherine Cortez Masto following complaints to her state offices from Nevada constituents who have suffered financial hardship.

A former Nevada attorney general, Cortez Masto, a Democrat, is planning to file a bill to provide protections to franchise owners before the Senate takes its month-long August recess, an aide said Friday.

The senator vowed to file legislation following a Senate banking subcommittee on economic policy hearing this week where Keith Miller, a Subway franchise owner from California and a franchisee advocacy consultant said fraudulent practices have left franchise owners in financial ruin.

Cortez Masto is also acting on complaints and concerns from Nevada franchise owners who have called her offices as they seek help trying to keep their businesses solvent.

“These entrepreneurs were upper-middle class but now face foreclosure and bankruptcy in a few months or years only because they bought a franchise,” said Cortez Masto, the ranking Democrat on the Senate banking subcommittee.

Cortez Masto said she has heard complaints from Nevada franchisees who were forced by franchisors to sell products that their customers did not want and forced to purchase over-priced supplies from vendors.

Many were given inaccurate revenue and financial projections by the franchise corporations when they filled out documents for loans.

The franchise industry, Miller said, “has allowed many to realize the American Dream.” Sometimes, though, that dream can turn “into a nightmare,” with the government becoming an enabler that puts franchise owners at considerable risk, he said.

Miller used the example of a Reno nutrition franchisee who suffered when the franchisor pulled support from brick and mortar locations and then aggressively marketed the same products online at reduced prices.

“His finances are in shambles and he’s heading towards default on his (Small Business Administration) loan,” Miller said of the Reno franchisee.

The nutrition franchisor, however, kept its $49,000 in franchise fees collected per outlet and stole the customer base of its former franchisees, Miller said.

Many people who buy franchises do so with taxpayer-backed small business loans. Miller said some franchisors provide specific consultants to franchisees to help them fill out the projections and complicated documents needed to get those government loans.

Many times, personal guarantees are required to get the loans, placing the franchisee at risk of not only losing their investment, but other personal assets as well. Some franchise buyers are unaware of the inflated revenue projections used for the loans, projections determined by the corporations that receive a “royalty” on profits.

Nevada was one of the top states for franchise growth last year, according to the International Franchise Association. The number of establishments was forecast to grow 3 percent last year, making it likely that defaults will likely continue in the state.

Cortez Masto asked Miller about bad actors in the franchise industry who specifically target immigrants, veterans and retirees.

She said her legislation would require accurate revenue and default information from the franchise corporation before a potential franchise owner gets a guaranteed loan from the Small Business Administration. The goal is to allow potential franchise owners to better understand the risks before they take out loans.

Contact Gary Martin at gmartin@reviewjournal.com or 202-662-7390. Follow @garymartindc on Twitter.