Franchise not always the answer

“These mechanisms of control are played out from industry to industry…Franchising is universal in the way it operates.”

The Barrie Examiner
January 12, 2000

Franchise not always the answer
Laurel Lane-Moore

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Les Stewart, head of the Canadian Alliance of Franchise Opertators, is warning people to use caustion when investing their funds into potential business ventures. Dought Crawford Photo

Les Stewart has some advice for Barrie’s Molson employees: Beware of franchise pitches promising big profits and the chance to be your own boss.

Workers facing the loss of full-time jobs and the prospect of receiving a large, lump-sum severance package are tempting targets for the growing but risky franchise market, warns the Midhurst man.

“I’d like to send a cautionary note to all of the Molson workers,” said Stewart. “In the last three years doing franchisee advocacy, I’ve seen franchise sales people target people when they’re most vulnerable and when they have the most cash.”

As head of the Canadian Alliance of Franchise Operators, Stewart has been working to raise awareness of franchise abuse and boost protection for franchisees under provincial legislation.

Stewart is also urging existing and former franchisees to speak out at public hearings slated to be held around the province in the coming weeks to discuss proposed new legislation, known as the Franchise Disclosure Act.

The proposed bill, tabled last month by Minister of Consumer and Commercial Relations Minister Bob Runciman and now is in the committee stage, would help small business franchise investors make informed decisions before signing franchise agreements or paying out any money.

“The purpose of the legislation is to provide information to potential purchasers of a franchise and regulate the relationship after the purchase,” explains Stewart. “This is the first time the Ontario government is seriously looking at a law to regulate franchising. We’re happy somebody’s finally recognized there’s a problem.”

Buying a franchise may seem like a speedy way for employees to become employers and steer an exciting new career course.

But, cautions Stewart, even experienced business people can get tripped up by the many hidden pitfalls in the lucrative franchise industry. Franchisees currently generate an estimated $45-50 billion in annual sales in Ontario and account for about 40 cents out of every retail dollar in the province.

But whether they’re pushing donuts, burgers, or motels, the big winners in the industry are the franchise owners, not the franchisees, according to Stewart.

“It requires a great deal of knowledge to not become the next sad story of franchising,” he said.

Each year in Ontario, 5,000 new lawsuits are filed in the franchise industry, Stewart points out.

“The industry is really fraught with conflict,” he said, noting there are currently about 500 franchise owners and 40,000 franchisees in Ontario.

As a former franchisee, Stewart, 40, knows first hand about the potential for conflict and devastating financial loss in the industry.

After being laid off in 1992 from his job as a financial analyst in the health care industry, Stewart made the decision to invest in a lawn-care franchise known as Nutra-Lawn.

Eight years later, that decision continues to haunt him and his wife. The couple suffered a major financial setback and is still embroiled in a legal battle with the franchise owner.

Stewart offers himself as an example of the kind of franchisee the industry likes to brand a “disgruntled loser” and doesn’t want potential franchisees to listen to.

Armed with an MBA from London’s University of Western, financial experience in the business world, current market research and legal advice, Stewart figured he was well prepared to launch his franchise operation in the Barrie area. But he was wrong.

“I still lost $140,000 in two years,” he said. “Sometimes, even doing the best due diligence and looking before you sign is not enough. Something you have to realize is you are betting all your money because this relationship is effectively for your working life.”

Attracted by the apparent success of popular franchise businesses, many newcomers to the industry aren’t aware of the tight controls they will face under complex contracts with franchise owners, says Stewart.

Many contracts, for example, require franchisees to buy inventory and supplies from the franchisor, forbid them to talk to the press, and prohibit them from operating a business in the same line once they have terminated their franchise contracts.

“These mechanisms of control are played out from industry to industry,” said Stewart, president of the tiny association he describes as the only franchisee advocacy group in Canada. “Franchising is universal in the way it operates.”

People who invest in franchises with the idea of running their own business often find they are neither employer nor employee, enjoying neither the control of a boss nor the protection of an employee.

“The person who invests in a franchise may find, ‘I’ve invested all my money but someone else has total control of my assets,” said Stewart.

Through the alliance’s newsletter, website and advocacy efforts, Stewart hopes to help other people avoid becoming casualties of a complex industry.

“Our goal is fairness in franchising. We want to be able to encourage laws that recognize the unique characteristics of franchising and also educate people thinking of purchasing a franchise and help people in crisis.”

For more information on franchising issues and The Canadian Alliance of Franchise Operators, call 705-737-4635, or log on to http://www.cafo.net


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