Protection for the franchisee

(Stewart’s) experience drove him to form the Canadian Alliance of Franchise Operators and the fruits of their efforts in part was last week’s introduction of the Franchise Disclosure Act…“The severity of the problem and incidence of difficulties will become apparent in public hearings,” says Stewart of the upcoming hearings. He hopes the recounting of horror stories will persuade the province to toughen up the rules and appoint ombudsmen so investors don’t have to go to court to enforce their rights.

The Toronto Sun
December 23, 1999

Protection for the franchisee
Disclosure Act introduced
Maryanna Lewyckyj

For some budding entrepreneurs, franchising would seem to be the best of both worlds.

It offers the allure of being your own boss while still having a guardian angel to guide you along with a brand name to boost business.

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That idyllic view of the industry isn’t shared by everyone, including Les Stewart of Midhurst, who lost $130,000 in two years in a franchise and is still in litigation.

His experience drove him to form the Canadian Alliance of Franchise Operators and the fruits of their efforts in part was last week’s introduction of the Franchise Disclosure Act. If passed, it will require franchisors to disclose key information to potential franchisees before any contract is signed.

“It’s a step in the right direction,” notes Stewart. “Disclosure is the cornerstone of any franchise law. It really is a matter of imbalance of information and power.”

If passed, the legislation would require franchisors to provide a list of all current franchisees (not just the successful ones), as well as former franchisees. This would let would-be investors gauge the turnover.

Also, franchisors would have to disclose if they’ve been involved in previous franchises and provide information about their background and litigation history.

Contracts would have to spell out termination terms and detail exclusivity of territory.

“The severity of the problem and incidence of difficulties will become apparent in public hearings,” says Stewart of the upcoming hearings. He hopes the recounting of horror stories will persuade the province to toughen up the rules and appoint ombudsmen so investors don’t have to go to court to enforce their rights.

“Once the contract is signed, there is a monopoly situation on information and economic power,” he says, adding he also worries new rules may lull investors into a false sense of security. “What I fear is that at franchise trade shows, people will be told ‘Don’t worry. We’ve got a law now.”

There are an estimated 500 franchisors and 40,000 franchisees in Ontario and Richard Cunningham, president of the Canadian Franchise Association, says some people wrongly assume all franchises are as successful as the big names.

“The world of franchising is not always McDonald’s or Tim Horton donuts,” notes Cunningham. “They need to take that into consideration.”

Even if a law is passed, it won’t guarantee there wouldn’t be business failures even with full disclosure.

“You’re only protected if the franchisor hasn’t lived up to their obligations in the law,” says Cunningham. “The franchisee may not be very good at selecting sites or making arrangements with suppliers. The law doesn’t address that.”

Stewart says it’s important to do a lot of research, talk to current and former franchisees, talk to a lawyer who specializes in franchise law and not rush decisions.

“There are many good systems out here,” notes Stewart. “But it’s difficult to separate them.”


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Risks: Trade shows a major source of revenue for franchisor associations, Trade show are where the greatest lies are told, Les Stewart, Canadian Alliance of Franchise Operators, CAFO, Imbalance of information and power, Churning, (serial reselling), Franchise show, Ombudsman, Weak law worse than no law, Current franchisees can’t talk freely, Justice only for the rich, Disclosure laws: False sense of security, Attempts to rehabilitate image, Monopoly or near-monopolies creates sub-optimal capital allocations, Canadian Franchise Association, CFA, Canada, 19991223 Protection for

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