Chained down

Too bad Ontario doesn’t have the courage to come out punching…Ontario will soon become the second province to regulate the franchise industry. But its legislation is expected to lack teeth.

Canadian Business magazine
September 11, 1998

Chained down
Ontario will soon become the second province to regulate the franchise industry. But its legislation is expected to lack teeth.
Donna Green

Hamburgers, pizza, mufflers, carpet cleaning, tax-return preparation. You name it, there’s a franchise for just about everything. Franchising is big business in Canada, though no one knows exactly how big, and it is almost entirely unregulated – a regrettable fact for the many franchisees who have lost their life savings by joining up with less than reputable franchisors. So far, only Alberta has enacted laws to regulate the franchise industry. But now, after five successive Ontario governments have backed off, it looks as if the Harris cabinet will finally weigh in this fall. The rest of the country will be watching closely. Too bad Ontario doesn’t have the courage to come out punching.

The expected legislation – made public in a consultation paper released this June –addresses only two issues in an industry desperately needing ground rules: disclosure and the right of franchisees to form associations. But even those do not have much of a jab.

As it stands now, a prospective franchisee cannot require a franchisor to reveal anymore information than it willingly provides. Ontario’s legislation is expected to require full disclosure of the franchisor’s operations, including a complete list of past and present franchisees, the business background and litigation history of the franchisor and its officers, bankruptcy or insolvency information and financial data. Strangely, however, the legislation does not require that this disclosure be in plain English or in a standard format for easy comparison. Most objectionable, however, is the consultation paper’s deliberate vagueness in calling for financial disclosure, the most essential information for prospective franchisees.

Just what does “financial disclosure” amount to? The Ontario Franchise Coalition wants nothing less than audited financial statements. At the very least, legislation should require the franchisor to fully disclose its sources of income. A chain that makes its money from the sale of supplies to franchisees is a less attractive investment than one with a robust royalty stream. Sources from the Franchise Sector Working Team who consulted with the Ontario government prior to the paper’s publications, say it is very unlikely the province will require either audited statements or an income breakdown. Audited statements are expensive for small franchisors, and full-income disclosure is thought to reveal too much sensitive competitive information.

Of course, most franchisors are reputable and aboveboard. Forthright disclosure, however, would result in fewer franchisees entering economically exploitative arrangements. Still, even more could be done. Franchisors need a baseline standard of conduct. They should not be permitted to commingle franchisee-paid advertising funds with their own operating funds, easily cancel franchise agreements or impose unfair terms to renew those agreements. No one knows just how prevalent abuses are in the industry. It was hoped Ontario would establish a registry to collect statistical information. It is not likely to, even though franchisor and franchisee associations have clamored about it for years an estimated 40 of every retail dollar being spent in a franchise business in Canada. Everyone has an interest in keeping this vibrant industry healthy, honest and open. Ontario and other provinces, for that matter could certainly do more to ensure just that.

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Risks: Ontario Franchisee Coalition, Toothless law, Franchise Sector Working Team, Register franchisees and franchisors, Advertising fund put into general franchisor's coffers, Life savings gone, Industry in disrepute, Credibility, Public perception of sleaze and greed, Signs that potential franchisees are nervous and aren’t buying, Mask of respectability, National press coverage, Canada, 19980911 Chained down

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