Dental Fix Sues Franchisee for 18 Years of Royalty Payments

Patrick: Hey, I’m Patrick Findaro here, the co-founder at Vetted Biz. I’m very excited to have on Brandon Moore. He’s a former franchisee of Dental Fix as well as an IT professional. And we’ve been trading notes going through the SBA loan data, especially for franchise loans. Brandon, maybe we could just do a quick recap on how you got into the franchising space.

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Brandon’s beginnings at Dental Fix

B: Before starting the Dental Fix franchise, I had a business working with dental offices doing their IT equipment. I was close to the dental industry already and I had a reputation for doing that. And because of what Dental Fix offered, it made sense for me to kind of bring the capabilities that they offered onboard. That’s when I quit my day job back in 2015 and went down the franchise venture.

P: You were already kind of in this industry, then you saw an opportunity in franchising? Were you working with a consultant or a broker? Did you just approach the franchisor directly?

B: Believe it or not, with my wife, we were looking for something to get me out of, working for a corporate office. She had her own business and so we were looking to break out of that. She was a dentist as well. So, it was very handy, having all of those capabilities in-house, so to speak. And so there were drawers to Dental Fix that played well with what I was looking to do with an IT company, and so it made sense.

P: Did you open up a location in Virginia?

B: Correct. I was in the Northern Virginia area.

Before Entering the Business, Create a Successful Exit Strategy

P: Could you tell us a little bit about that process, how it was opening and running a Dental Fix franchise?

B: It was interesting. It was the exhilaration of opening up a business and trying to get over that hump. Just, unfortunately, with Dental Fix that hump is a lot larger than anticipated.

P: How I see it, it’s a time to open, break even, and then hit substantial income. And some of those humps can take a long time.

B: Exactly.

P: And what made you wanna get out of the franchise system and move away from owning a franchise?

B: I’ve always been on the mindset that with any business venture, you got two good years of sweat equity going into it, that if it’s not paying by that time, you have got to start looking at your exit strategy.

P: That’s well said. You put your head down for two years, you push full force, and if it’s not working, you had 24 months that you were pivoting, working with the franchisor, or working with your business partner, and then from there, you have got to pivot.

B: That’s about how it went for me. I launched in September of 2015 and I officially terminated in October 2017.

P: Then what happened after you terminated? How did you get down this rabbit hole of looking at franchise data?

B: When I terminated, there was litigation involved because the franchisor wanted to collect on 18 years of unpaid royalties. And so, what sparked going down the rabbit hole was when I got sued, I didn’t have money to pay for litigation. Fortunately, I, hooked up with really great attorneys and we worked out a deal. We kind of made it a group effort. And the going down the rabbit hole happened organically. Because, every time we have got to call somebody up, another person needs an exit strategy. But so far the only exit strategies look financially brutal.

Financing Methods at Dental Fix

P: Did most Dental Fix franchisees that you spoke to, did they get SBA financing, or were they most just investing their savings?

B: There was a blend of how people structured their financing. Specifically, with the Dental Fix loans, there were 55 loans total that we’re aware of. About 20% of franchisees were funded through SBA. They also had some people that funded it through the IRA. Some people used both. Towards the end, I think that they tried to use crowdsource funding, but I don’t know if anybody was successful in using that.

Two Biggest Lessons when it Comes to Taking Loans

If you’re looking an SBA funding, you must go with a local bank. Don’t go with a broker. If you go with a local bank, you’re going to make sure that you benefit as a borrower from the underwriting process.

B: With an SBA It’s going to save a lot of time. If you do get an SBA loan, you have opening equipment packages. Technically when you buy this equipment coming out of your SBA loan, it needs to be properly collateralized. This means that if you have to liquidate that equipment you bought, it needs to be able to sell for what it’s collateralized for. So, make sure that your franchisor is not taking, an unfair margin.

P: I’d want a bank to go through and spot any issues and properly underwrite them. Where if I’m not getting lent to buy a house, that’s a little too risky for me to invest in. And it seems like a similar parallel would be, for this case, investing in a franchise and getting an SBA lending.

Investing in Dental Fix Franchise: With a Bank as Mediator, Conflicts of Interest are Avoided

B: I think the important thing is that the brokers have gotten too cozy with the franchisors. And when you go with a local bank, you’re ensuring that that relationship is arm’s distance. You’re never going to have a conflict of interest because the bank likely has never worked with that franchisor before. There’s not a big concentration of loans like that.

P: It could be quid per quo. Like if the franchisor is giving the broker candidates that don’t already have financing and vice versa, you could be kind of in the crosshairs of a relationship that you’re just upon it, I guess.

B: Exactly. And it looks like that’s what we experienced with Dental Fix because the loans got issued for just two years. And then they stopped, there was no more. What made at those two years, suddenly, that loan is no longer something that a bank is interested in. You would think a good investment would be a good investment regardless of a two-year timeframe.

P: And then collecting information on, like, the financials and trying to forecast breakeven actually, making a substantial income from the business.

About the Needer of Reading the Franchise Disclosure Document’s

P: Did they have item 19? Were they disclosing financial numbers?

B: In this case, no. And these sorts of representations were sprinkled throughout their marketing. The big one was, you get 5 jobs a day, $175 an hour. They put out representations about total annual revenue for the whole system, which you could, extrapolate from.

The issue with that is it was corroborated a lot by their discovery day process and the person that they had you meet with. They were proffering up a neutral organic franchisee, who is an industry veteran. He’s been doing this for a while. And the Washington State order is great because it’s just like you read it and it just blows your mind. You would think that you would need to disclose this.

P: They had like a supposed franchisee that was validating everything the franchisor was saying in terms of financials and the road to profitability?

B: Yes. My experience was I emailed the franchisor for information. When I first talked to them, I tried to get financials. And the sales agent was like, “No, no, I can’t talk about that,” which is correct. But then she emails me a list of people who can and number one was this guy. And so the public is part of my lawsuit.

Item 19 at the FDD

P: Do you think all franchisors should all be disclosing the sales and the unit-level economics of franchisees?

B: I would like to think yes. you don’t see these sorts of issues with the established brands. And so maybe part of the answer to all of this is to go out and establish your brand independently, and then franchise.

P: And a big thing, in the income statement of the franchisor, you can see generally line item how they’re making money. Whether it’s through franchise fees, selling franchises. Or what we like to see at Vetted Biz, royalties. And they’re going to grow that as they have franchisees that are opening up multiple locations, increasing sales.

The Due Diligence Process

B: During your due diligence process, you have got to loop in somebody that knows a little more than you, like an accountant or an attorney.

P: You’re a first-time investor, a first-time buyer of a franchise, but an attorney reviewed 1000 FDDs. And an accountant went through hundreds of franchises. And on the franchise attorney side, did you have counsel or did you work with a corporate attorney reviewing documents?

B: No. I used an accountant for the acquisition. He was an accountant in the dental industry.

Dental Fix and an Unanticipated Breach of Contract Lawsuit

I was sued for breach of contract for, 18 years of royalties for closing my shop, but I was also sued when I presented to them, the disclosure document that had the true description of the gentleman they had in the van during discovery day…

…And so I got sued as a result and we went through the litigation process. During deposition, though, the CEO, David Lopez, when he was questioned why they sued me, said, “Because of the statement Brandon was making.” He didn’t mention the contract. And so to me, it looks like retaliation to me.

P: Well, also you see the trail of executives. Because of these bad actors. They bounce around to another franchise system where, if it’s like a publicly-traded company and you have some issue against you, you can’t serve on the board of another publicly-traded company. The SEC is not going to allow you to keep being a public officer. Where for franchising, these guys just bounce around and it’s like there’s no shame in selling 300 locations, and 10 or 20 of them actually opened up and did well.

B: The group of people involved with this started working with the attorneys that came after me. But a lot of these people came from Quiznos. One of the directors of sales for Dental Fix or franchise development, Scott Mortier, was named in the massive Quiznos lawsuit, the one that resulted in a 200 million dollar lawsuit.

P: They had to go bankrupt Quiznos. They went to 4500 locations down to like 220.

B: And it’s because of similar stuff, man.

The same Managers moved from Quiznos to Dental Fix

B: This guy was named personally on that big federal lawsuit. They dropped it when they settled. He was also involved with the same franchisor David Lopez for another venture back in 2008. And he was the recipient of the Virginia regulatory order. Part of the Dental Fix issues that they omitted from their disclosure document. In that case, he flouts the rules. It’s like we do have systems in place to inform the prospects when that scenario occurs, but in this case, they avoided it. And that’s something that both Virginia and Washington state called out. The chief operating officer came from Quiznos as well. And he was named in a lawsuit for similar stuff.

P: Quiznos went bankrupt right after 2008, 2009. They were taking too much from the franchisees and the system started imploding. There’s been prior litigation and prior bankruptcies, profiles, and executives. But at the end of the day, if they don’t share the proper information in the FDD, then, the best franchise attorney or the investor, unless they’re doing public searches, they’re not going to pick up on some of that information.

The Historical Aspect is the Important Part to Keep the Franchisors Honest Year over Year

B: Here’s the thing that haunts me. All of this Dental Fix stuff, we were able to pull off because the state of California hosts the federal disclosure document repository for everything that’s been submitted and it’s historical. I found attorneys, litigation, regulatory orders… But California has an issue with its system. They said it’s hosted on SharePoint. You can’t access that FDD anymore. Had I not looked for that FDD right when I did, I may have missed it and I would be another bankrupt guy.

P: Wow. At Vetted Biz, we’re going through all the FDDs, so it’s easy for people just in one spot to have access to all the documents and to have those for many years to come.