Displaced Workers Beware: tales from the Franchising Trenches

Franchise salespeople look for people when they are at their most vulnerable - when they are at a career crossroads. If you have always dreamed of buying into the ”next McDonald’s” and you have received a severance package, you may very well be at ground zero…Perhaps the darkest hours of franchisee-investment are about to pass.

Huronia Business Times
February 2000

Displaced Workers Beware: tales from the Franchising Trenches
Les Stewart


We have some advice for former Molson employees - beware of franchise system recruiters promising big profits. There are few quick fixes in business and franchising may become more of a nightmare than a dream.

Franchise salespeople look for people when they are at their most vulnerable - when they are at a career crossroads. If you have always dreamed of buying into the ”next McDonald’s” and you have received a severance package, you may very well be at ground zero.

Most franchises are directly marketed to inexperienced, perhaps over-trusting first time business owners.

Some observers classify these people as naïve or greedy. At the Canadian Association of Franchise Owners (CAFO), we prefer stigmatizing them as individuals who anticipate a commercial relationship built on mutual trust, fairness and honesty.

There is very little accurate public numbers about the franchise industry and caveat emptor (or buyer beware) tends to conceal, not quantify, the investor’s financial risk.

What we do know is the following: in Ontario there are 40,000 franchisees that employ 400,000 to 500,000 people.

These entrepreneurs have invested over $6 billion in our province’s economy. Up to 40 cents of each retail dollar flows through a franchised outlet.

However, there are also 5,000 new franchise industry lawsuits filed every year. These figures come from the Ministry of Consumer and Commercial’s (MCCR) discussion paper in 1998.

Of course, most commercial disputes ranging from the most serious to minor are not part of that 5,000.

The imbalance of economic power and information is so great that most disputes are resolved by the franchisee yielding to their franchisor’s will.

There is hope though. Perhaps the darkest hours of franchisee-investment are about to pass.

Minister Bob Runciman, MCCR introduced the Franchise Disclosure Act (Bill 33) last December. CAFO congratulates him for championing the protection of small business entrepreneurs by scheduling public hearings starting on March 6, 2000.

These hearings will be held in Toronto, London, Ottawa and Sault Ste. Marie.

Public hearings looking into the franchise industry are very rare. The last were almost 30 years ago and resulted in The Grange Report.

Justice Samuel Grange, who retired from the Ontario Appeal Court, was commissioned in 1970 to look into franchising, multi-level selling and pyramid selling.

The abusive nature of some franchise relationships came through very clearly in those public hearings:

Throughout the evidence it was a recurring complaint that the franchisee is constantly plagued with the threat of termination of the franchise; the franchisee has invariably invested time and money; and he knows that he will lose it all if the franchise comes to an end.

Naturally, he is prepared to be servile, and if not, he is generally not long for the franchise family.

Franchisee-investors are not traditional employers or employees. They enjoy neither the control of a boss nor the protection of an employee.

The franchisee owns the assets but the franchisor has almost total control over the use and disposal of those resources.

As a former franchisee, I know what I am talking about. After being laid off in 1992 as a financial analyst in a large London hospital, I decided to invest in a lawn care franchise in Barrie.

In 1992, I evaluated this franchise opportunity; completing what the trial court described as excellent due diligence. We lost $140,000 in the first two years of our franchise.

Over a five-year period, our franchise realized about 25 per cent of the sales that I had planned for.

Perhaps I was incompetent? Of the 24 markets that operated in this system from 1990 to 1997, 17 ownership changes took place.

This is how ‘churning’ is defined and is typical of systems that, intended or not, view franchisees as expendable.

Our experience would indicate that pre-sale disclosure laws alone are not enough and that the dirty tricks come out only when the agreement is signed.

My franchise agreement was terminated in 1997 and they brought a lawsuit against me in February 1998.

This happened, in part, because I openly talked of my financial position with fellow franchisees. Starting Canada’s first franchisee advocacy association was a result of my own and others personal experiences

It is hard enough running a small business. Doing it while having to defend against a well-capitalized franchisor that wants to make an example of you for their other 1,800 franchisees requires a lot of help. This has been by second business degree.

I am what the industry is quick to marginalize as a disgruntled franchisee, or in short, a loser. CAFO members carry a contrary message to the carefully branded images of the “blue chip” systems, and by analogy, the whole franchise industry.

CAFO encourages everyone to look very, very closely when promises of easy money are made. There are over 1,200 franchise systems and only a handful that have proven to provide value over time.

Until an appropriate franchise law is here, it is impossible to tell who may prove to be your true enemy. Remember, your life savings are at stake.

Speak to former franchisees: they know a thing or two about the franchise wars.

Recently, CAFO requested meetings with the three Simcoe County – area MPPs to discuss our members’ (and their constituents’) support for Bill 33. We thank Garfield Dunlop (Simcoe North) for his support of our local small business community.

Veteran Franchisees & Former Franchisees
To Do List

CAFO encourages franchisees and former franchisees to tell their story. The deadline for public hearing oral presentations is February 10th.

Add your e-mail address to our ‘Bill 33 Update’ bulk e-mail database and we will keep you informed.

Check in at our website as Bill 33 moves through hearings, recommendations, Second Reading and, with some help, into law.

Les Stewart founded the Canadian Alliance of Franchise Operators in 1997. Stewart continues to operate an independent lawn care business in Midhurst.

You can reach CAFO by telephone at 705-737-4635 or by fax at 705-737-4950
The web site is http://www.cafo.net
E-mail address: ten.ofac|trawetsl#ten.ofac|trawetsl

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