9 SEVEN LEAGUE BOOTSTRAPS

LOTS OF EQUIPMENT was stored in the huge Dodge plant when Tucker and his associates moved in, including typewriters, mimeographs, adding machines and office furniture, but there still wasn't any money except what Tucker could scrape up by borrowing and making deals for his own block of “founder's stock,” the value of which was still hypothetical.

But people staked out office space and went to work. There wasn't much engineering yet because space hadn't been cleared for working areas, and even if there had been there wasn't enough money to set it up. And this need for immediate money inspired the franchise program.

Selling franchises wasn't new. Tucker didn't invent it. But he was the first to make it a big operation with promise of raising enough money to get started. Altogether, thirty-three new companies were launched after the war to build automobiles.

Some of the new companies sold franchises, which may have given Tucker the idea. Wherever he got it, Tucker was the only one in the organization who believed it would work. And he was the only one of all the newcomers who built up a franchise operation into the big money bracket, enough to make an actual start on design and production. Altogether approximately $6,000,000 was raised through sale of franchises.

Credit for success of the franchise program belongs largely to Fred Rockelman, whose background as sales manager for Ford gave him an immense and practical knowledge of the problems that had to be solved. Under his direction territories and quotas were set up, and the multitude of forms worked out to put the operation on a businesslike basis and—they hoped—offer prospective distributors and dealers a plan that was both fair and legal.

The first franchise plan, which was launched in July of 1946, set the price at $50 a car over a two-year period, with a provision to hold the money in escrow until enough was obtained to pay for preliminary design and start production. If the amount raised wasn't enough the money would be refunded. If enough was raised, initial $50 deposits would be credited to purchase of cars as they were delivered.

Interest in foreign countries had been tremendous since the car was first announced, so headquarters for this part of the franchise program were set up in New York. Max Garavito was the natural man to head it, since he was already well established in the export business and had contacts all over the world.

In September, when the franchise program had gotten off to a good start, the Securities & Exchange Commission moved in with what they called an “informal investigation,” launching a series of probes that continued with hardly a break over the next three years. While there had been no stock issue yet, and theoretically at least SEC wasn't even involved, the Chicago SEC office said “franchise agreements then being entered into constituted a security within the meaning of the Act.”

Although this was an unexpected snag that caught them at a critical time, Tucker and the sales department didn't argue, and made every effort to get along with SEC without discontinuing the program entirely. Lawyers for Tucker and SEC haggled for months, through conferences and interminable correspondence, trying to reach an agreement. Meanwhile the program lagged. It was hard to work up much enthusiasm when Tucker might have to give the money back and start all over.

Finally a new plan was worked out under which the buyer of a franchise didn't stand the ghost of a chance of ever getting his money back unless the company got into heavy production. While this may have scared some of the dealers out, it apparently was satisfactory to SEC, and months after the “informal investigation” was first announced Edward H. Cashion, SEC chief counsel, said:

“It is my opinion that the sale of these distributor and dealer franchises will not involve the sale of a security within the meaning of the Act.”

In a letter outlining major features of the new plan, Rockelman wrote SEC:

“We believe that the dealer franchise agreement form is so drawn up that no individual purchasing such an agreement could be misled concerning the nature of the transaction. However, in order to further protect the corporation we will make it a practice of reviewing with each purchaser the nature of the transaction, and to satisfy ourselves that he is not purchasing the agreement under any misunderstanding or in reliance upon any facts which are untrue.”

What this meant in simple English was that dealers who bought franchises were putting their money in a crap game, and that is exactly what many of them were told. Max Garavito, head of the Tucker Export Corporation in New York, told essentially the same story:

“Before we sign a franchise they have their lawyer in my office and I have my lawyer. I tell them if we do not build an automobile you don't get anything. You don't even get so much as one bolt. There is no misunderstanding. They understood very clear that the only way they can win is for us to win.”

The new contract called for payment of $20 per car over a two-year period, with half of the amount in cash and the balance in notes, payable at the end of a twelve-month period. SEC approved the new arrangement as in no way constituting the sale of securities, its first objection, and got Tucker off the hook for immediate money when it spelled out the terms:

That “the monies received would not be refundable under any circumstances but would be used by the corporation forthwith for general corporate purposes.”

While Tucker had high hopes for raising enough capital to get started through the franchise program, he realized he would need a lot of money after he finally got formal possession of the plant next March 1. With a firm lease already in his possession, contingent only on having $15,000,000 capital by that date, Tucker met with Cerf again and they signed an underwriting agreement on September 30. The first agreement was in longhand, and made official a few days later with a seventeen-page typed agreement signed by Tucker and Cerf. Two days later, on October 2, Cerf announced a $20,000,000 issue of common stock would be offered as soon as it could be cleared with SEC.

Up to signing of the underwriting agreement, meetings with Cerf had been mostly in his offices on La Salle Street, heart of Chicago's financial district. With the agreement signed, Cerf was seen frequently around the plant, and when he ventured an opinion he got attention. And with reason, because the future of the corporation was in his well-manicured hands, and his skill in setting up and handling the machinery to sell stock. Cerf had his own successful brokerage business long before he met Tucker, and his manner reflected his success. Short and balding, he rather resembled a miniature Buddha when he sat in one of his big office chairs with his legs crossed under him, in the belief that this improved his circulation. He was intense and single-minded, and we early learned not to make jokes about the stock issue or anything connected with it around him, because to Cerf there was nothing funny about money, least of all the even remote possibility of losing it.

With the underwriting agreement signed and the franchise program going strong again, Tucker was ready for the next step—developing a prototype automobile which, under his agreement with Cerf, was to be completed before the stock was sold.

Raising initial capital through sale of franchises was one of the boldest and most successful bootstrap operations in industrial history, but it could not be said that Tucker conned the dealers. They were in a king-size crap game, and most of them knew it.