10 Lessons from a Franchise Fraud in Texas

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Las Quesadillas Franchise Fraud Targeted Wealthy Mexicans Moving to Texas

 

Las Quekas quesadillas y sopes

On April 13, 2021, The United States Attorney’s Office announced a Mexican businessman, his wife and two collaborators were charged with a Million Dollar franchise fraud.

The charges allege that from 2015 to 2019, the defendants promoted Las Quesadillas (aka Las Quekas) franchise opportunities throughout Texas including in  San Antonio and Houston.

Defendants, Adriana Pastor and Juan Enrique Kramer, were paid $105,000 to $250,000 for building and opening each Las Quesadillas Mexican restaurant. One investor even paid $350,000 including a master license for parts of Houston.

Pastor and Kramer agreed to perform the following tasks on behalf of each Mexican e2 visa investor:

 

  • finding and renting a suitable location
  • obtaining all permits
  • helping in obtaining e2 visas for buyers
  • completing construction
  • training employees
  • handling all legal fees and incorporation issues
 

Instead of performing the above tasks, the defendants used the funds for personal gain or to repay previous investors who demanded back their money (aka a pyramid scheme).

When partial repayments and other poor remedies were not accepted, Kramer and Pastor stopped communications after threatening to sue the investors for breach of contract.

More than eight different Mexican investors were allegedly defrauded in the Las Quesadillas franchise fraud according to the full indictment.

quesadillas facade

Sadly, at Visa Franchise, we have heard about MANY fraudulent business opportunities targeted to foreign nationals seeking an E-2 visa. This includes a trucking fraud, solar homes distributorship and emerging restaurant chain. Not to mention the countless independent businesses  where the seller inflated profit numbers to the E-2 visa business buyer.

Although there is risk in ANY E-2 visa business for sale, the upfront risk of fraud can be limited through these ten steps:

 

1. Do not let your guard down when someone of the same nationality and/or language presents a compelling business opportunity

Instead of letting your guard down when someone of the same nationality is promoting a business or franchise opportunity, keep your guard up!

Many frauds occur between people of the same nationality. It could be a Mexican defrauding a Mexican, Canadian to Canadian or Brazilian to Brazilian.

The cultural similarities and language allow the victims to lower their guard. This allows the fraudster to take advantage of the new immigrant!

 

2. If marketed as a franchise opportunity, you should receive a Franchise Disclosure Document (FDD)

Make sure if a business being sold to you is a franchise you receive a FDD and franchise agreement. Generally, you should receive both documents (the franchise agreement is included in the FDD) after the first meeting or call.

Always ask when you can expect to receive these documents. If a FDD is not readily provided this is a HUGE red flag. At Visa Franchise, we have found no evidence that Las Quesadillas is actually a franchise despite being marketed as one.

 

3. For franchises or licensed business models, speak to at least three prior investors as part of your due diligence

Do not trust the word of whoever is selling you a franchise or business opportunity. Speak to multiple prior investors and visit actual store locations. Ask for their financial performance and see what documentation they would be willing to share (point of sale records, etc).

You should be wary of franchisors/licensors that encourage speaking to just one prior investor. This prior investor could be receiving compensation from the franchisor or have some deal behind the scenes.

 

4. Look for brand longevity and multiple locations

Focus first on franchises that been around for many years with multiple locations.

The average franchise a Visa Franchise client invests in was founded 10+ years ago. Some have been around for over 40 years!

Generally the E-2 visa franchise opportunity should have been founded 5+ years ago and 3+ locations with net positive cash flow.

Do not be shy to ask for profit and loss statements (P&Ls) and try to get a tax return if at all possible (can be tough from franchisees).

Do not invest in a new, unproven concept!

 

5. Require financial transparency before investing

60% of franchisors disclose their financials through item 19 of the FDD. If there is no item 19, you can ask for financials from current franchisees and see if any franchise resales are available.

Generally, after signing an NDA with the franchisee selling his location, you will receive the past 3 years P&Ls and tax returns for that location. Then, you can have a base line of ACTUAL numbers to model out your financial assumptions.

There are also ways to estimate the system wide sales based on the royalties collected by the franchisor in their profit and loss statement. Reach out to us for more information on this strategy.

 

6. Background check especially if the business is a non-franchise

Franchises are required to disclose in the FDD prior litigation and bankruptcies of the parent company as well as major owners and executives.

There are third party providers you can engage for background checks on franchises, licensed businesses and other business opportunities. This is really important anytime the business is not a franchise (e.g. a licensed business) .

 

7. Have a Plan B

It is easy to go with the first option that a smooth sales guy presents to you. This is especially true when you do not have ANY other compelling options. Always seek multiple options for your E2 visa

If there are red flags and you get cold feet with a franchise, you can change to focus on another franchise opportunity.

 

8. Do not partner without clear financial controls and an airtight operating/ management agreement

Do not write blank check for the franchisor to spend the money how they see fit if they are offering a turn-key solution. Every expense needs to be accounted for when the franchisor is responsible for supporting  the build out and initial operations for you.

There should be penalties in play if the franchisor or minority operating partner goes over budget. Maybe they are required to inject more capital before you?

For a primer on key items to be included on an E-2 visa business operating agreement, check out the following article: E-2 Investor Series – Operating Agreements By: Anthony Lopes, Esq

 

9. Work with the right advisors

You should have a franchise and/or corporate attorney review ALL the investment documents on your behalf. These documents might include the lease, franchise agreement, management agreement and operating agreement.  Make sure the attorney ONLY represents you not the franchisor/business partner as well.

Also, it is important to engage an immigration attorney who solely represents you as the investor. Do not rely on the project to help obtain an E-2 visa for you.

A franchise consultant or business broker can support your initial search and analysis for a franchise or E-2 visa business for sale.

Beware of franchise brokers who only work with a select group of franchises. They may be more interested in receiving a large commission from the franchisor than finding the right franchise opportunity for you.

For an existing business  for sale, an accountant is important for due diligence and later on to review ongoing financial reports.

 

10. Invest only what you are comfortable losing

Whether there is fraud or not, 50% of businesses in the U.S. fail within the first 5 years. According to data from the Bureau of Labor Statistics, only 30% of businesses make it to 10 years. Be prepared to lose ALL of your invested capital should the E-2 visa business fail.

Following the above steps will reduce your chance of falling prey to franchise fraud. However, even a franchisor with a flawless record could have a major lapse of judgement and commit fraud. Keep your guard up and surround yourself with the right advisors as best you can.

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