Franchise book of interest to anyone who pays taxes

At its worst, Lorinc says, franchising is a haven for the unscrupulous who prey on the unwary – typically recent immigrants willing to labour long hours in dreary businesses, unaware that those operations have little chance of prospering – using them as pawns in a shadowy real estate game. Rather than reflecting an insatiable consumer demand, he inquires acidly, is it possible that all those new doughnut shops may reflect a quiet understanding between landlords and franchisors that the best way to fill fallow commercial property is to sell franchises to credulous investors?

The Globe and Mail
November 1, 1997

Franchise book of interest to anyone who pays taxes
Ann Finlayson

John Lorinc, a Toronto-based journalist, has written a book aimed at a growing niche market: Canadians who may be tempted to buy a franchise. If you happen to fall into this category, read this book! It could keep you from making a bad mistake. But Opportunity Knocks deserves a wider readership, too if only for the insights it provides into Canada’ rapidly changing economy. What began as a trickle of American fast-food chains spilling over the border into Canada in the sixties and seventies – McDonalds, Kentucky Fried Chicken and A&W among them – is today a $30-billion per annum industry with an uneven, often troubled history, and uncertain prospects. It is also an industry that, except in Alberta, is virtually unregulated – the “Wild West” of Canadian business where honest, hard-working entrepreneurs with sound franchises on offer co-exist with snake-oil pitchmen who scam the gullible and (usually) get away with it.

Considering the perils and pitfalls documented so thoroughly, if rather unexcitingly, in the copious case studies in Opportunity Knocks, it would seem that investing in a franchise is not for the faint of heart. Yet, ironically, franchising is attracting a new clientele in the nineties: down-sized, and probably unemployable, middle managers with substantial buyout packages whose primary goal is to buy themselves a job. Lacking the experience and the entrepreneurial gumption to go it alone, Lorinc says, they are drawn to franchising in the hope that it will minimize their risk, only to be confronted by unanticipated problems: unprofitable locations, hidden costs, and constant tension in the franchisor-franchisee relationship.

At the root of the tension is the dual nature of franchising. Most franchisees, Lorinc says, have a straightforward goal: to run a moderately profitable business. Every franchisor, however, operates in two distinct markets, one for franchises, the other for the product or services those franchises sell. The problem is that it is not always easy for potential investors to discern whether a franchisor’s primary interest is in the product, or simply in selling more franchises as quickly as possible. When the balance is right – and the product or service is sound – franchising can be a win-win situation for everyone. When the balance is wrong (or the franchisor is recklessly expansionist, exceptionally greedy, obsessed with the need to control, or downright crooked), it can be a nightmare.

At its worst, Lorinc says, franchising is a haven for the unscrupulous who prey on the unwary – typically recent immigrants willing to labour long hours in dreary businesses, unaware that those operations have little chance of prospering – using them as pawns in a shadowy real estate game. Rather than reflecting an insatiable consumer demand, he inquires acidly, is it possible that all those new doughnut shops may reflect a quiet understanding between landlords and franchisors that the best way to fill fallow commercial property is to sell franchises to credulous investors?

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OPPORTUNITY KNOCKS
The Truth About Canada’s Franchise Industry

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By John Lorinc
Prentice Hall Canada, 367 pages, $22.95

Does all this matter to you? Yes, it does. In 1993, in the wake of vigorous complaints by small-business owners that Canadian banks were reluctant to finance them, Ottawa raised the ceiling on loans guaranteed by the Small Business Loans Administration to $250,000 and its guarantee rate from 85 per cent to 90 per cent, sparking a bank lending rush to franchisees and shifting the risk of franchise investments onto taxpayers’ (your) shoulders. So the next time you sit down with a cruller and a cup of coffee in an empty doughnut shop in the mall, you might wish to ponder whether John Lorinc is correct when he argues that a soupcon of regulation just might improve your day.

Ann Finlayson is co-author, with Sandra Martin, of Card Trick, Bankers, Boomers and the Explosion of Plastic Credit.


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