A teacher’s impossible dream

The lawyers said the Sauers used “fabricated” and “inflated” revenue and profit projections when selling franchises to Rosovkski and others and “misrepresented the profitability of the corporate stores.”

The Toronto Star
February 3, 1999

A teacher’s impossible dream
Profits don’t add up for these tutoring franchisees
John Deverell

LousieTrudelKruithof.jpg

Louise Trudel-Kruithof tried to buy herself a great new job. Instead she learned a brutal, expensive lesson.

A franchise doesn’t guarantee success, and a franchisor’s promise of riches can be so much hot air.

Trudel-Kruithof, an engineer and former department head at George Brown College, needed new work after leaving the institution at age 50.

In 1996, while attending a trade show at the Canadian National Exhibition, she discovered the Academy of Mathematics and Science Inc., a franchised tutoring service.

Academy, directed by Balti and Elaine Sauer, encouraged Trudel-Kruithof to imagine that she could make an income of $80,000 a year from anxious Canadian parents willing to give their children a leg up in life with extra tutoring.

Instead, more than two years in, Trudel-Kruithof has sunk nearly $70,000 into the franchise, has earned not a penny on the investment or for her full-time labour and is still battling to reach the point where revenues cover direct operating expenses.

Balti Sauer, Academy’s president, told The Star last week that several disputes with rebel franchisees are in early stages before the courts “and we should leave it in their hands. It needs full investigation.”

Trudel-Kruithof, remembering her cordial initial dealings with the Sauers, said ruefully that she really liked the idea of the tutoring business.

As a college teacher she knew most first-year failures are attributable to student weakness in math and science.

“There was definitely a market for the product,” she said in an interview.

Others share that judgment. Gordon Metcalfe of Francon Consulting, who keeps a comprehensive franchising database, said the number of franchised private teaching businesses in Canada increased 11 per cent last year.

Among those offering services akin to the Academy of Mathematics and Science, the leader is Kumon Educational Institute of Canada. It has 335 Math and Reading Centres, all but two of them franchised.

Other significant franchisors include Oxford Learning Centres with 53 franchises and three corporate outlets, and Sylvan Learning Centres with no corporate outlets and 60 franchised.

At present, the Sauers’ Academy has eight corporate and 31 franchised outlets, three fewer than last year.

Balti Sauer and his sales force make the rewards of serving the burgeoning tutoring market sound terrific.

Academy literature implies that for an up-front franchise fee of just $27,500 and working capital of $7,500, a franchisee like Trudel-Kruithof can soon hope to generate revenues of $100,000 a year and clear $35,000. Sauer, assuming the owner works for no salary, calls this a 100 per cent return on the original investment.

Sauer’s second projection is for revenue of $150,000 and income for the franchisee of $50,000.

The third “typical” projection is for revenue of $200,000 with the franchisee clearing $80,000 before taxes.

The academy franchise agreement calls for a royalty of 15 per cent of gross revenue – well above the sector average of 9 per cent – and, until last week, a minimum payment of $1,000 a month.

Last week, however, Sauer told some franchisees he is dropping the minimum royalty.

Trudel-Kruithof started her Academy Learning Centre in Hamilton’s Limeridge Mall in the fall of 1996, and within a month realized that what she’d been led to expect by the Sauers was a pipedream.

Within a year she’d ploughed $57,900 – much of her severance payment from George Brown – into the struggling new business, but without anything resembling the exciting results of the academy prospectus:

  • She says that recruiting large numbers of new customers in the mall, a basic part of academy strategy, turned out to require high-pressure techniques that she and her employees were unwilling to pursue.
  • The profitable tutoring ration – five students per instructor per hour – was rarely achieved.

She blames this in part on the audiovisual teaching aids supplied, which featured South African accents and South African monetary examples. The Hamilton students found that distracting.

  • Academy’s teaching materials contained errors that the franchisees, often teachers, were told to correct themselves.

Each time Trudel-Kruithof brought a problem to the attention of academy head office, she says, she was told she was the first franchisee to do so. Throughout 1997, as nearly two dozen disgruntled franchisees began to compare notes, they discovered that each of them had had the same experience: They were told there were the first to complain about problems that in fact were shared by many of the franchisees.

Several franchisees confirmed to The Star this pattern of communication.

The franchisees soon formed an association to renegotiate the agreements, in particular the $1,000-a-month minimum royalty, but got nowhere.

In October, 1998, shortly after Academy ordered its franchisees to raise the tutoring fees, which had ranged between $20 and $35 an hour, Trudel-Kruithof and six other franchisees dropped the Academy name, turned in their South African teaching cassettes, stopped making royalty payments and went independent.

In December, Academy, seeking to enforce its franchise agreements, asked the Ontario Court, general division, for an injunction requiring the operator of the former Academy Learning Centre in Scarborough’s Woodside Square to turn over her business location and records to Academy officers.

Sauer’s lawyer told the court that Sofia Rosovski, and by implication all the other rebel franchisees, shouldn’t be allowed to run tutoring businesses within 80 kilometres of he former Academy locations.

Justice Katharine Swinton denied the injunction, noting that if it were granted “the defendant would be without employment and without anything to show for her years of work invested in the business.”

Rosovski’s defence featured the rosy income statements Sauer used to sell her the Woodside Square franchise as a going concern, and later a set of statements for the same period that were far less appealing.

Albert Franck, lawyer for the Academy, told the court Rosovski’s allegations of misrepresentation” that should be decided before Rosovski suffered any inconvenience at the hands of the court.

Lawyers John Sotos and David Sterns, acting for the rebel franchisees, told the court that Rosovski, now 60, still owes $30,000 to Canada Trust, borrowed to pay the Academy franchise fee back in 1995, and that she has borrowed from relatives to cover later operating losses.

The lawyers said the Sauers used “fabricated” and “inflated” revenue and profit projections when selling franchises to Rosovkski and others and “misrepresented the profitability of the corporate stores.”

Indeed, financial statements disclosed in November, following the Academy’s listing on the Alberta Stock Exchange as Learnco International Inc., showed the operation had an accumulated operating deficit of $520,000, including a loss of $300,000 in the first 10 months of 1998.

Annual revenues to the end of November, 1997, were $1.1 million with $363,000 of that from new franchise sales and $325,000 from royalties.

During the first 10 months of 1998 new franchise sales plunged to $141,000 while royalty income stayed flat at $326,000.

The eight outlets run by head office last year reported revenues of $464,000 and direct expenses of $456,000 – not including head office costs or the salaries of Balti or Elaine Sauer, last reported at $53,000 apiece.

A tale of two income statements
Academy’s projected income statement “based on existing Learning Centre experiences.”

Number of Students 65 100 150
Revenue* $100,000 $150,000 $200,000
Rent 14,500 14,500 14,500
Tutor fees 17,000 24,000 31,000
Salary – assistant 3,000 21,000 24,000
Promotion 6,500 6,500 6,500
Printing & misc. 7,000 8,500 10,000
Group advertising 2,000 3,000 4,000
Business & support program 15,000 22,500 30,000
Total Expenses $65,000 $100,000 $120,000
Net cash for owner 35,000 50,000 80,000
Potential return on investment 100% 142% 228%

  • Revenue based on the number of students per week.

Actual experience based on Louise Trudel-Kruithof’s Academy of Mathematics and Science Learning Centre **

Year 1 Year 2
Revenue $21,000 $74,000
Rent 12,400 21,000
Tutor fees 10,000 26,000
Advertising & promotion 10,000 17,500
Other 3,000 8,500
Royalties 3,000 10,000
Start-up expenses 13,000
Franchise fee 27,500
Net cash for owner -$57,900 -$9000
Wages for owner None None
Return on investment None None

**Unaudited owner’s estimates


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