Franchising stumbles along perilous path

Franchising is in danger of becoming disreputable. If current practices go unchecked, legitimate businesses will find it more difficult to raise expansion capital through franchising, especially the new enterprises that inevitably drive the economy.

The Globe and Mail
May 25, 1998

Franchising stumbles along perilous path
John Southerst

Franchising has reached a crossroads. That doesn’t mean the business format that brought us McDonald’s hamburgers and Midas mufflers is facing an imminent demise. It’s a matter of reputation and, therefore, value.

Franchising is in danger of becoming disreputable. If current practices go unchecked, legitimate businesses will find it more difficult to raise expansion capital through franchising, especially the new enterprises that inevitably drive the economy.

The erosion in reputation stems from everyday industry practices: lopsided standard contracts that give all rights but no clear obligations to the franchisor: franchise sales people who treat the facts promiscuously: and the lack of recourse for franchisees in disputes. The only option if often years of litigation during which the franchisor stalls while legal costs mount.

Franchise lawyers and desperate franchisees tell the same stories, again and again. Investors are told a location makes $10,000 a week when it actually brings in $2,000: refundable deposits are never returned: and some chains ask for deposits as high as $40,000 before giving the franchisee a contract to review.

Some chains impose themselves as the fixed source of supply at non-competitive prices. Then there’s the big issue of encroachment. That’s where franchisors compete with their franchisees by placing another store nearby or through alternative means of distribution, such as grocery stores or direct mail.

It’s not so much that there are more –or worse- disputes than in previous years. The problem is the persistence of recurring complaints and the inability of the aggrieved to simply get before a judge.

“I think the single greatest problem in franchising with respect to the redress of wrongs is the practical problem of getting someone to adjudicate the dispute,” says Peter Dillon, a franchise lawyer in London, Ontario. “It’s not uncommon for cases to take four years to get to court and rack up $150,000 in legal expenses.”

The Ontario government has known about franchising’s problems since 1971, when a special committee detailed widespread abuses and recommended regulation and oversight by a special franchising body.

Since then, various governments have maintained that draft legislation was weeks or days away. These unkept promises have become a running joke in franchising circles.

The inaction speaks volumes because so many franchisors reside in Ontario, and other provinces – with the exception of Alberta, which already has legislation – would likely to follow its lead.

Toronto lawyer John Sotos, who has represented many franchisees, argues that the reason no government has gone forward is because franchisees are not organized. “They have no representative voice. Franchisees are individuals.”

The implication is that governments past and present listen only to corporations and to loud, large lobby groups. They do not respond to the concerns of the politically powerless.

But some franchisee advocates believe legislation would not make much difference. They believe that the problem is structural, reflecting the unequal relationship between franchisor and franchisee.

“The answer isn’t legislation, it’s advocacy,” says Les Stewart of Barrie, Ont., who heads the Canadian Association of Franchise Operators, a small but growing franchisee group. “Ten thousand franchise cops couldn’t stop the failures.”

That’s because would-be buyers continue to believe what they’re told without doing a reality check, he says.

Franchisors and legislators in jurisdictions such as Ontario say this is not their problem. Don’t interfere with the freedom to enter into contracts, franchisors say. You can’t legislate against stupidity, legislators say.

But vendors should not be able to hide behind false promises and complex contracts by claiming investors should have read the document more carefully before signing them, says Susan Kezios, president of the American Franchisee Association in Chicago. “There is no sacred right to enter into whatever contract you can con someone into signing.”

Ms. Kezios advocates what franchisors fear most: relationship legislation. This means law governing the most contentious and common franchising conflicts – termination, renewal, transfer to a new owner, tied sources of supply, opening of competing outlets by the same franchisor and other issues.

She says this doesn’t mean regulatory oversight of private contracts. “It’s like a speed limit. [We’re] just saying ‘This is the limit of what you can do.’ “

In Canada only Alberta has franchising legislation which imposes not-too-onerous duties of “fair dealing” and disclosure, exempting large franchisors.

Ontario continues to drag its feet. After several years of study and a report three years ago from a franchisor-franchisee working group that endorsed legislation based to the Alberta model, the Ministry of Consumer and Commercial Affairs is sill “refining” the proposals.

A ministry spokeswoman says more proposals will be sent to an industry group this summer. If legislation results, she says it will take “a buyer-beware approach” and the government “doesn’t want to get too intrusive.” The government may legislate minimum levels of disclosure, “but that doesn’t mean we’re going to do it.”

Meanwhile, the disputes continue.

John Southerst is a Toronto-area writer who covers franchising issues and can be reached at ac.ratsi|htuosj#ac.ratsi|htuosj

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