The Monday Q&A: No loan, no more business

As banks cut back their ending, small businesses are having more and more trouble staying alive. How that plays out locally depends on who you talk to.  Andy Schwabe is filing for personal bankruptcy after losing more than $200,000 of borrowed money on a failed children’s gym called Romp n’ Roll.

Schwabe initialed borrowed $185,000 to build the day-care, and then borrowed another $44,000 for operating expenses from his bank (which was the same bank as the franchisor). He also took out several other loans through the SBA and another bank.

Schwabe wanted to opened his own Romp n’ Roll in Midlothian after seeing how popular it was in the West End. His daughter loved it. So did he and his wife. So he became a pioneering franchisee (the franchisor is also in Richmond). But Schwabe was unable to bring in enough kids to cover the loan, and rather than lend him more money to meet expenses, he ran out of money last month. The franchise went back to the franchisor, who is now running it.

Schwabe discussed the demise with BizSense. Below is an edited transcript.

Richmond BizSense: What’s the state of your business?

Andy Schwabe: This is one of the things I’m really upset about. In my franchise agreement, it said the franchisor can just slide right in and take over my business without paying anything. The bank had a lien on the gym and stereo and sold it to him for $15,000. So the Midlothian Romp n’ Roll is still open.

RBS: How did you know you were in trouble?

AS: At first I figured it was the first-year blues. But we got more and more into the hole. And the number of kids coming in stayed strangely the same. Monthly income also stayed strangely the same, around $13,000 to $15,000.

RBS: You had no trouble securing $150,000 for the build-out. So what went wrong when you needed more capital?

AS: We needed money to operate. So we wanted to refinance the loans, but nobody was talking to me. We went to BB&T, Village Bank, and all sorts of other banks. We couldn’t get anyone to talk to us. No one would budge. We tried to save the business but the banks wouldn’t give us time.

RBS: The banks are in the business of getting their money back. Maybe they didn’t want to flush good money after bad?

AS: Well, our other option was bankruptcy. And we had two new programs we wanted to try. You see, there was a flaw in the business plan. We were pioneering franchisees and the model didn’t work like it did in the West End. We talked to other franchisees in other markets and they said the same thing.

But we were running out of money big time. I went in to the banks and said here’s what I need. The guy almost wet his shorts. He was flabbergasted. They gave me $44,000 to pay my bills but no operating line of credit. I needed money to operate but I had no more collateral.

RBS: Did your interactions with your bank deteriorate? Was there yelling?

AS: There wasn’t any yelling. But I was late on 100% of my payments all the time. And I was borrowing from Peter to pay Paul. The banks didn’t like the late payments, so they put a lot of pressure on me, saying, “We don’t care what your situation is, we need our payments.”

RBS: Do you think you could save it with more money?

AS: In my gut, I’d say no. There is a flaw in the business model. And I didn’t have deep enough pockets to sustain myself.

RBS: How did this affect your personal life?

AS: I am the emotional part of the family, and I’m sad and angry. My wife is glad I’m out of it. It was putting a lot of pressure on my marriage and my kids. And it was putting a lot of stress at home. My wife loved that I would be in business for myself (formerly in marketing for CBS 6). But at the end my wife couldn’t wait for me to be out of it.

RBS: You seem to think the bank could have acted differently. What would have been better?

AS: If the bank had come to the table, and restructured the loans, and said, “let’s make this work.” Or brought in the franchisor. These economic times require different kinds of thinking.

Editor’s note: Next week we will be speaking with a local banker.

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Tom Stanley
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I was on Yahoo and found your blog. Read a few of your other posts. Good work. I am looking forward to reading more from you in the future.

Tom Stanley

Matt Paxton
Guest

This brings up a good point that entrepreneurism is NOT for everyone. Just because you think it would be cool to work for yourself, doesn’t mean you’ll be great at it. Most entrepreneurs struggle for 7-10 years before they are succesfsul. I know VERY few entrepreneurs that have made it on the first try. No offense, but take some responsibility here. You can’t blame it all on the franchisor and the banks. I don’t know the people that started Romp N Roll, but entrepreneurs in general have failed over and over in the past and used it as a learning… Read more »

Blackbeered
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Blackbeered

Schwabe could be the poster child for today’s type of “failure” … it’s anyone’s/everyone’s fault but his own. The only information I have about his case is what’s stated here … and there’s more than enough to see he was ill-equipped [brains and money] to embark on this journey. “borrowed $185,000 to build the day-care, borrowed another $44,000 for operating expenses, took out several other loans through the SBA and another bank” … grossly undercapitalized it would appear … he’s lucky his lenders lost more than he did. “unable to bring in enough kids to cover the loan” … where… Read more »

Ben Evans
Guest
Ben Evans

>>These economic times require different kinds of thinking. I agree, but not necessarily from the need for more lending. Having a monthly revenue of $13-15K should have kept the lights on with a lean staff. >>You see, there was a flaw in the business plan. No business plan can foresee everything, and it requires regular adjustment. When the budget isn’t adding up, you have to be the one who thinks outside the box and gets creative. I’m not a big fan of franchises and this is why. They give a false security that someone can write a check (or get… Read more »

Tom Lawrence
Guest

First, I will admit my bias; I am a franchise consultant but prior to that had 30 years experience as both frachisee and frachisor. One truism in franchising (and in life) is that no idea is so good that someone can’t figure out a way to screw it up. In this case, we have no way of knowing if there is, indeed, a “flaw” in the model or if the franchisee “screwed it up”. What we can safely surmise is that the buyer did have that “False sense of security” that Ben mentioned. Did he get that from listening only… Read more »

Michael Barnett
Guest

I am the Co-Founder and CEO of Romp n’ Roll.

While I am thankful for the publicity that Romp n’ Roll of Midlothian is open and under new management, I must refute the claim that our business model is flawed. We took over operations of the Midlothian location on January 1 and subsequently not only generated a monthly profit, but also the highest sales volume in the 15 month history of that unit.

For more information on Romp n’ Roll of Midlothian or to schedule a free trial class, please visit http://www.rompnroll.com/midlothian.

Tina McDermott
Guest
Tina McDermott

I think this is an interesting topic with many different views so I want to add mine! I admire Mr. Schwabe for his attempt to live out the American Dream as a small business owner. I see where there could be some blame put on him however his franchisor made a note above stating how he came in and saved the day and I don’t think that is a fair statement because obviously if he bought the business or had it handed to him for $15k then OBVIOUSLY his overhead is considerably less and he is basically profiting off of… Read more »

Andy Schwabe
Guest
Andy Schwabe

I wanted to respond to some comments made regarding my experience. First of all some of the comments made were based on only what was on the screen and nothing more. The fact is that the whole story is really not there and if the whole story were there I would think many readers might have a different view point…maybe not. Further, the amount of information that was not disclosed to me in the beginning, I am now finding, was vast. Even when asked direct questions many answers were not complete as I was to find out later. My bank… Read more »

Jack Miller
Guest
Jack Miller

I have been reading this exchange with great interest over the last few weeks. Not only am I a local business person, but my child has attended classes at the above mentioned location. What Im seeing and what I have heard directly from Mr. Shwabe when he was still operating the location was a consistent lack of focus and accountability. He and I had more than a few discussions in the lobby of his location, and it was almost comical, the lack of focus he had on appropriately maintaining his “empire”. His staff was great, the product is something that… Read more »

John Medved
Guest

My son attended classes at the Va Ctr (under both owners) and West End Romp-n-Rolls. They were always awesome. The staff of the two facilities were great and bent over backwards to be helpful in any way and their programs were a special time for myself and my family. I belive that this feeling can be said by most parents that have spent an hour or two a week in a romp-n-roll class. I am an insurance agent and I loved being able to spend a hour or two a week playing hooky from the real world in “open gym”.… Read more »

Roger Reynolds
Guest

I am a franchisee here in the Richmond area. We own the VA Center location. I consider Andy a friend so commenting on his experience would be something of a conflict of interest but I can say that I don’t feel nearly as neglected by the Barnetts and our bank (People’s Bank), as he seems to. We are all feeling the pain of the economy but nearly everyone around us has been willing to work with us to put programs in place that will ease the burden (even if very temporarily). Every little bit helps. What makes me know that… Read more »

Anonymous
Guest
Anonymous

I used to work there under andy
there wasn’t a “flawed” business model
he didn’t know what he was doing…. at all…

Anonymous
Guest
Anonymous

and in response to Jack Miller’s comment…
yes the constant cussing and so forth was NOT a good environment for children
you hit the nail right on the head, he was not socially a good fit
his antics used to frighten the children