It’s ‘buyer beware’ for franchisees

“Many franchisors advertise that franchising is the safest business to get into, safer than an independent business,” Sotos said. “But at least one recent study has shown just the opposite: It is safer on the whole to start an independent business.”…“The more opportunity for exploitation by the franchisor, the more likely the franchisee is going to be taken advantage of,” Sotos said.

The Toronto Star
January 8, 1996

It’s ‘buyer beware’ for franchisees
Claire Berstein

Thinking about investing your life savings in a franchise? You should know a few things:

“Purchasing a franchise is not for the uninitiated,” says Toronto franchise lawyer John Sotos, a partner with the Sotos Karvanis law firm. “And not for someone without experienced guidance. So consult with someone who knows the industry before going into it.”

Don’t sign anything until you’ve shown the agreement to a franchise lawyer with experience in the industry in which you’re thinking about investing.

In Canada, about $90 billion a year changes hands in retail sales at franchised firms.

There are many good franchise operations, Sotos said, and there are the other kind – that can cause investors to lose their shirts.

“Many franchisors advertise that franchising is the safest business to get into, safer than an independent business,” Sotos said. “But at least one recent study has shown just the opposite: It is safer on the whole to start an independent business.”

A good franchise lawyer can spot a scam artist by looking at the proposed contract.

“The more opportunity for exploitation by the franchisor, the more likely the franchisee is going to be taken advantage of,” Sotos said.

For instance, if the contract provides for the franchisor to control the maximum price you can sell the product, and if the franchisor is also the sole supplier of the product, watch out.

If there’s no provision that supplies are going to be sold to the franchisee on competitive terms, Sotos said, then the franchisor can charge above market, resulting in no profit for the franchisee.

He pointed out a few more twists to look for:

  • A clause in the agreement that gives the franchisor the right to require the franchisee to make major investments without a realistic payback being provided. That means the franchisor can come in a year or two and ask the franchisee to make major additional investments without economic justification.
  • Watch out for general terms that give total discretion to the franchisor to change the deal. For instance, you buy a franchise for an upscale ladies clothing store. Five years later the franchisor says, “We are now going discount.” If you’re at a carriage-trade address, with carriage trade rents, you’re out of luck.
  • Beware of franchisors who operate a large number of corporate stores. If there’s a shortage of some popular product, guess who gets it.

Add to these traps, clauses that prohibit franchisees from forming associations with other franchisees, or clauses that don’t allow them to divulge draconian clauses to the news media, and you can see the quicksand waiting to suck in the naïve would-be franchisee.

Sotos has one last chilling word of warning: Don’t expect the courts to get you out of the jam. Ordinary contract law applies. That means that, barring extraordinary circumstances, you are presumed to have been a knowledgeable, informed businessman when you signed. Which means you agreed to be fleeced.

The crux of the problem is that there is no franchise legislation to protect the franchisee, except in Alberta.

Other provincial governments have been talking about legislation to govern the industry for more than 20 years.

What’s so difficult?

All they have to do is provide legislative ground rules ensuring a level playing field for all.

While most franchisors companies play by the rules, a significant minority do not.

In these cases, the would-be franchisee has only one protection – an experienced franchise lawyer.

Claire Bernstein is a Montreal lawyer and syndicated columnist. Her column appears every other Monday.


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Risks: Survivability (franchisee and franchisor), Short- or forced-shipping, Futility of taking legal action, Blame the franchisee, Caveat emptor - let the buyer beware, Outright scam, Must buy only through franchisor (tied buying), Short- or forced-shipping, Franchisor controls retail prices, Gouging on supplies, Corporate stores competing with franchisees, Can’t talk to media, Opportunism (self-interest with deceit), Canada, 19960108 Its buyer

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