Hard Lessons

But, $80,000 and nine months later, Raftis was taking the company to court. His dreams of security, profitability and success were dashed. Like many franchising neophytes, be bought into the erroneous concept that the word franchise was synonymous with “safe investment.”…as many as 80 per cent of new franchisees lose their businesses…

London Business magazine
December 1995

Hard Lessons
Franchising may hold promise for profitability – particularly to the shell shocked jobless seeking a safe investment for their severance package. But buying one is no guarantee of success…As some London franchisees are finding out.
Marilynn Vanderstay

Ernie Raftis, his wife Llivia, and two of his best friends were very excited with what they were seeing and hearing. The man on the platform was enthusiastically describing the possibilities of the pretzel business with all the sincerity, charisma and polish of a Tony Robbins-like pitch man. A set-up guy, purported to be the ex-president of a hugely successful American cosmetics direct sales business and an ex-RCMP officer, told his story of success with North America’s fastest growing fast food industry. His unstoppable enthusiasm, and the implied achievement by the appearance of himself and his two colleagues, kept the potential investors in the rented auditorium riveted in their seats.

But, $80,000 and nine months later, Raftis was taking the company to court. His dreams of security, profitability and success were dashed. Like many franchising neophytes, be bought into the erroneous concept that the word franchise was synonymous with “safe investment.”

Fortunately, the majority of franchise opportunities are not scams, nor are they planned to fail. In fact, the industry makes a significant contribution to the economy, accounting annually for some $90 billion in commercial activity in Canada, with approximately $45 billion in Ontario alone.

But, John Sotos, a Toronto-based franchise lawyer, speculates that as many as 80 per cent of new franchisees lose their businesses because they don’t do their homework before investing. Franchises can fail because of lack of market research, experience, franchisor support, undercapitalization, choosing a wrong location, or just plain bad luck. Sotos, who represented franchisees in the Pizza Pizza franchise failure, formed the first franchisee’s coalition in Ontario. And contrary to Canadian Franchise Association statistics, he believes that the number of franchises that do not make it is the same as the number of new independent businesses that fail.

Why so high? It may have something to do with the relatively new bred of franchisee. More than one third have been ousted from traditional jobs, and with severance packages burning a hole in their pockets, they turned to franchising. Many of these people, like Raftis, have neither the business experience, nor an understanding of the retail “game”. Traumatized by the shock of losing their jobs, probably forever, these previously accomplished professionals are thrown into a forum where they are not even explained the rules.

Raftis has just turned 40 and was supporting three young children when he was downsized from his job at the Toronto Star in 1990, and saw the handwriting on the wall. At his age, and with the current economic climate, he knew there would not be another corporate job for him. With 10 years severance money in his pocket, Raftis, his wife, and colleagues were at the Markham Business Show to find a profitable business that would not only be an investment, but create a job and a future for him.

Since he didn’t have any small business or retail experience, Raftis mistakenly believed he could count on the expertise and experience of the franchisor. He did not know that the franchise industry is not regulated; there is no code of ethics, legislation or disclosure rules. And although governing legislation would be desirable for the sake of the franchisees, explains Eleanor Friedland, policy issues coordinator for the Ministry of Consumer and Commercial Relations, with government cutbacks, the onus will still be on the would-be franchisee to do significant homework before investing.

Raftis’ first and biggest mistake was that he did not hire his own lawyer, but shared the franchisor’s counsel. Richard Cunningham, president of the Canadian Franchise Association, believes that both parties should use their own lawyers. And, he emphasizes, the franchisee should use a lawyer who specializes in franchising.

Raftis’ friend moved first and paid $80,000 for the rights for the Toronto area. Although his friend experienced problems at the outset, Raftis plunged ahead anyway, paying $46,000, and his brother $6,000 for the London franchise. Raftis opened a wholesale/retail shop in the former Smuggler’s Alley on Dundas Street, and developed corporate accounts such as The Ceeps, the University of Western Ontario, and The Fitness Forum.

But it was too little, too slow. The company kept initiating new policies that the franchisors “had” to invest in. While Raftis and his friend were both barely sustaining themselves and getting more and more disillusioned, the franchisor kept coming up with new ways to get more money from the franchisees. The final straw came when the franchisor decided that rather than buying the frozen pretzels from the head office in the United States, they would bake, freeze and store them in the expanded Toronto facilities. In turn, they insisted each franchisee had to invest another $25,000 for convection ovens which the franchisee would lease to their clients so that the frozen pretzels could be baked fresh on site. Great idea, but the franchisees did not have any more capital. Later it would be discovered that none of the franchisees ever received their ovens, although they signed the leasing agreements.

After the ovens fiasco, Raftis had had enough and decided to pull out and sue. He eventually dropped the suit, knowing he wouldn’t likely see the funds even if he did win, but when all was said and done, Raftis had personally invested $80,000 including legal fees.

When Norm Kudzman, owner/operator of the Artful Cookie stores in Galleria and on Wonderland Road South, was downsized from his position as an auditor for Canada Trust in 1993, a friend introduced him to the originator of the Artful Cookie in St. Catherines. Kudzman fell in love with the concept, and thought it would do well in London.

Kudzman had worked in all capacities of banking since he was 16 years old. Other than loaning money to retail clients, however, he didn’t have any experience with the retail industry. Kudzman missed the camaraderie of his working environment, and thought a franchise would not only give him a job and a future, but a group of peers for support.

The franchise appeared to be a good investment. His two locations would be the seventh and eighth for the nouveau franchisor. Although his lawyer – who was not a franchise specialist – did not like the agreement Kudzman and the franchisor hammered out, he had few suggestions on how to change it. Since the investment was nominal ($2,500 for London and a 30 mile radius), Kudzman thought it was safe. He opened his first location on Wonderland Road in April 1994, financed by his severance package. To protect himself, he incorporated the business and owned the store himself.

Spurred by a quiet success, and a couple of investors, Kudzman opened a second location just eight months later in Galleria in December 1994, in time for Christmas business. Although he built a client base of 2,000 customers, the sag in the economy, coupled with growing too fast and the loss of his silent partner, has hampered his growth.

While the other franchisees are espousing success and growth, Kudzman has found it a struggle. Both outlets are still open, but the franchise is still not meeting projections. His biggest disappointment is in the lack of support from his franchisor and other franchisees, who are all women, and all in the Niagara Peninsula. Other than purchasing product and presentation packaging, and paying his franchise fees, he works independently. As he learns the rules of the game, both for retail, and for the London market, he is taking corrective measures. He has joined various networking groups, is considering hiring a corporate sales rep, and becoming involved in community activities. As survivor, Kudzman has adopted a positive attitude, viewing the venture as a learning opportunity he plans to continue to pursue.

Undercapitalization, unrealistic expectations of the Canadian market, and bad luck are the potholes that Mail Boxes, Etc. owner Doug Daye fell into. His location on Wellington Road South is one of two Mail Boxes, Etc. franchises for sale in the city – although the other is for personal reasons.

Daye purchased the franchise, the 18th in Canada, with a silent partner in 1991. His investment of $105,000, came partly from his severance package. He isn’t dissatisfied with the franchise, but explains it just did not grow according to the American franchisor’s projections, and start up was so slow, they fell a year behind expectations.

The fact that this location became a retailer’s nightmare didn’t help. Kipling’s, a popular watering hole and the main attraction to the plaza when Daye moved in, closed and sat vacant for four months. Construction on an eight-unit movie theatre was halted. Two more stores closed. And at Christmas, the peak season for package delivery and mail, a hole was dug by the plaza operators that blocked the entrance. Construction on restaurant Fu Lam City was held up. Pizza Hut burned down. A new management company took over the operation of the plaza and stopped maintenance. Snow wasn’t plowed so customers couldn’t get to the store, and potholes remain unrepaired. To add insult to injury, Daye discovered his supplier, UPS, undercuts his prices, and at one point, Canada Post was taking the franchisees to court to stop the selling of stamps. Another supplier, Xerox, cut prices in nearby print shops. Worst of all, his silent partner, a personal friend, wanted out and Day had to refinance payments to give him back his investment.

In the end, Daye ran out of time and finances. The bank, who had initially offered more capital, would not extend more money based on the present figures. Daye firmly believes that the franchise will take off but it will be longer than he expected. It’s not as if the business hasn’t grown, it has increased steadily since opening. But not fast enough for Daye’s financial needs. Meanwhile, he has taken a job as a sales representative for another company, and his daughter manages the store. “I am confident that in two years I will regret selling it,” he laments.

But it’s not all bad news-and opportunities can appear in the wake of franchising fiascos. When the Mother’s Pizza chain went belly up, Wes Aylesworth was there to pick up the pieces. American pizza giant, Little Caesar’s, stepped into the marketplace to fill the hole left by Mother’s and Aylesworth purchased the first Little Caesar’s outlet in 1979. Today his company, Viking Restaurants, has eight locations in the city, which he runs from his Detroit headquarters. Acknowledging he was in the right place at the right time, Aylesworth, believes his success is simple. “Do your homework, do research, get a good accountant and a good franchise specialist lawyer,” is his advice. Aylesworth, who used to count bicycles and wagons in driveways in a potential neighbourhood as part of his research, insists that location, location, location is paramount to success. And above all, he suggests be cautious, but don’t harness the spirit of entrepreneurship; be willing to take calculated risks.

Ernie Raftis, despite all his early troubles, would agree. Today, he is running a profitable business, and is even investigating putting the shoe – or in his case, rollerblade – on the other foot and becoming a franchisor.

Several months after finishing with the pretzels, Raftis recognized a new niche in the sports market: inline skating, better known as roller blading. With support and a loan from family, Raftis and his wife Llivia, opened London Rollers. In business now for four years, the company provides recreational inline skating instruction and rentals at the Western Fair Grounds and Greenway Park, and has a retail location at the head office on Albert Street. He has contractual agreements with both school boards to organize skating field trips to Greenway Park, complete with skates and instruction to students.

Raftis has become a veritable expert, not only on the fine art of inline skating, but the ins and outs of retailing, instruction, and rentals to different groups. Today, he is looking at being the franchisor himself, though he admits his early efforts were perhaps colored by his first franchising experience.

In trying to be the optimum franchisor, Raftis spent a good deal of the summer with a group from Windsor who wanted to open a franchise. He answered questions, shared strategies and was, in fact, a franchisee’s dream. But, the Windsor group lost interest just before signing the deal leaving Raftis to suspect they will open their own business in the spring using his knowledge and expertise.

But Ernie Raftis is nothing if not resilient, and he has taken stock once again of his mistakes and has prepared a loose licensing plan complete with his marketing strategies, forms and logos to enable London Rollers to expand. Next time he will take a downpayment before giving away all his secrets.

And he’s looking for the middle ground between franchisor from hell and Mr. Nice Guy. As someone who’s been there and back, it’s not surprising his favorite saying is “Evil flourishes when good people do nothing.” Through his experience, and loss in the franchise business, Raftis intends to be a part of the solution to straighten up a viable industry.

Buyer Beware

Caveat Emptor. When it comes to purchasing a franchise, it’s not only an appropriate saying, but should be a rule. Before deciding to invest in a franchise, consider following these tips from Eleanor Friedland, Consumer and Commercial Relations; franchise lawyer John Sotos; and Little Caesar Franchisee Wes Aylesworth:

  • Before considering a specific franchise, ask yourself why you are considering a franchise at all. Is it to make an investment, or to buy yourself a job? Any business, whether it be independent or franchise, does not turn an immediate profit. If you are creating a job, the experts agree that you should have enough savings to carry you one or even two years. If you are investing, what return on investment do you expect and how soon? And how does that return compare to investing your money at the bank?
  • Once you have found a potential franchise, consider three important essentials about it:

1. Is it a proven concept? If the franchise does not have corporate location, then it is not a franchise, but a partner in venture capital.

2. Does it have a competitive advantage in the purchase of supplies? Can you purchase your supplies or product for less as an independent, or direct from the supplier as a consumer? A major benefit of being a franchisee is the power of buying.

3. Does the franchise have a significant advertising program? In order for any business to get started, it must be known. Is there cooperative advertising? Conversely, is the advertising agreement flexible enough so you can do independent advertising without authorization from the franchisor?

Franchisees are at a greater risk if they do not do their homework. Before negotiating…

*Get a listing of all the franchisees from the franchisor. Take the time to speak with other franchisees. Are they happy with the franchise? Is communication good? Is the business as good as the franchisor promised or at least forecasted it would be?

  • Find out if there is a franchisee coalition and talk to them.
  • What is the flexibility to add new products? Would you have to participate?
  • Location, location, location. Other than purchasing a franchise, your most significant decision will be your location. Will your city need your product? Know your demographics. Who exactly is your customer? And where do they live or work?
  • After meeting with the franchisor, take the time to research and write your own business plan, including earnings and cost projections. Cost it out, set up expectations. If there is a big difference between your expectations and the franchisor’s?
  • The franchise industry is unregulated. It is a vast sector of unrelated business whose only common denominator is the concept. What regulation there is varies from province to province. All the experts agree it is best to get the advice of a proven franchise lawyer. Invest the money now, or pay later.
  • When seeking financing, deal with the franchise department of the bank or financial institution. They are experienced with franchises and often know the track records of established ones. The franchise department is not only a good source of information, which may mean less risk, but will also understand the industry.
  • Try not to borrow from family or friends. It may look great at the time, but rifts do happen, and you may lose your business as well as the friendship. The added burden of financial investment can also put undo stress on even an excellent relationship.
  • While the general advice is to be careful and to be cautious, Wes Aylesworth reminds would-be franchisees to “Take those calculated risks, but be cautious. And then enjoy.”
  • The Canadian Franchise Association has prepared an information package for would-be franchisors and franchisees. It is available for $24.95 by calling the Canadian Franchise Association at 1-800-665-4232.

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Risks: Canadian Franchise Association, CFA, Survivability (franchisees and franchisors), Ministry of Consumer and Commerical Services, Ministry of Consumer and Business Services, Ministry of Government and Consumer Services, Ministry of Government Services, Ontario, No franchisor support, Can’t talk to media, Hefty severance packages, Success rates fudged, Wild West of the business world, Caveat emptor - let the buyer beware, Canada, 19951201 Hard lessons

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