Franchise buyer beware, Wild West of the business world

“Frankly we have seen…illegitimate franchisors saying just about anything and the franchisee having no recourse to check this out.”

The St. Catharines Standard
February 21, 2000

Franchise buyer beware, Wild West of the business world
Editor would like to see mandatory disclosure law to protect prospective franchisees before they buy
Bill Currie

Bruce Bradley lost more than $60,000 when the travel franchise he ran at a Zehrs store in Niagara Falls failed.

It didn’t close because of poor sales or other business practice. Travel Counter, which had several locations on Loblaws-owned premises, shut down when the company’s owner went broke and the travel business license was lifted in January 1999.

It’s the kind of situation Ted Dixon has seen hundreds of times.

For 26 years, Dixon has stood on the sidelines of the troubled relationship between people who sell franchises and the often naive and uninformed people to buy them.

The typical scenario involves franchisees who lose their shops when the franchisor decides to retire or not renew an agreement.

To help clarify the rules in a mostly unregulated business environment, Dixon believes there should be a mandatory disclosure law to protect prospective franchisees before they invest and laws to govern the relationship afterward.

Dixon is the editor and publisher of Info Franchise News Inc. based in St. Catharines, the company started by his father Edward Dixon about 30 years ago, produces a newsletter and an annual directory of franchisors and helpful tips for buyers. Dixon said it’s the most widely read and complete directory of franchisors in the world.

Alberta is the only Canadian province to have franchise laws. Public hearings to discuss what is needed in Ontario will be held in Toronto, Sault Ste. Marie and Ottawa begin March 6. They are the first such hearings in the province in 30 years.

Dixon admits that most business people don’t favour much government regulation. But in the case of franchisees, they need to be protected because they frequently buy franchise rights without thoroughly investigating.

In every annual directory, Dixon publishes a comprehensive list of questions a buyer should ask a franchisor. He said the questions often go unasked, leading to uninformed franchise purchases. The Canadian Franchise Association also requires that questions be filled out by its member franchisors, but that isn’t enough because membership in that organization is voluntary.

Dixon said only about one per cent of franchisors are deliberately fraudulent, but most don’t disclose enough about their operations for buyers to make informed decisions,” he said.

“Frankly we have seen…illegitimate franchisors saying just about anything and the franchisee having no recourse to check this out.”
Ted Dixon
Info Franchise News Inc.

Dixon remembers about 10 years ago when fraudulent sales teams would frequently come to franchise shows with the largest booth and the most glitzy presentation only to leave buyers with what they later found to be a scam. Some of the franchisors were even caught being involved in stock manipulation schemes which ultimately destroyed the franchise, leaving people who bought into the franchise without their investment and without a viable legal recourse.

Even honest franchisors could be found to have tried 30 businesses in the past which all went bust and prospective franchisees would be forewarned if there were mandatory disclosure rules, he said.

Franchise legislation has not been an easy sell in Ontario, but it has been on the minds of government and business officials for years.

“The problem has always been that franchisees aren’t well enough organized to get this going. They’ve got their own businesses to run,” he said.

It’s only been in the last few years that the Canadian Franchise Association has been actively campaigning for self-regulating disclosure rules and other requirements that would protect its members.

“They were always paying a certain lip service to it, but the problem was that the franchisors did not want to, in any way, get more legislation in,” he said. “They just couldn’t bring themselves to do it and so far it’s worked, because we haven’t gotten it.”

There are federal laws to protect franchisees in the United States. Some states also have their own laws.

Dixon said a disclosure document about the history of the franchisor and a law requiring fair dealings on termination and non-renewal don’t necessarily answer the big question for most franchisees.

“The bottom line question for franchisees is how much money am I going to make,” he said.

That’s why Dixon said it’s necessary to look deeper into the financial history of other franchisees who have made deals earlier. It’s also something that franchisors are reluctant to provide, partially because it’s something that is impossible to guarantee.

Franchising was a new development in the late 1960s. At the time, a lot of the franchises were geared around celebrities.

“It was a real wild west show, far more than it is today because there was no legislation essentially,” he said.

The United States Department of Commerce once published a directory of franchisors, but Dixon boasts that his directory was better, because the U.S. federal government wasn’t trying to make a living at it.

“We always listed 1,000 to 2,000 more franchises,” he said. “We were out there digging.”

The company’s claim to fame has always been objectivity. It doesn’t make the majority of its money from listing franchisors who are interested in advertising. It makes more based on the quality of its research and its unparalleled listing of new franchises.

“We ultimately don’t care if people buy a franchise or not. We supply the information and try to tell them how to make their own decision,” he said.

The directory deliberately stays away from rating franchises, because Dixon believes most computer-based rating systems are flawed. He said arbitrary values are fed into computers that crunch the numbers and spit out a rating that might not take into account the entire picture.

“Nobody’s ever phoned up one franchise and asked if they are making any money,” he said. “So it sells magazines, but it does a great disservice to prospective franchisees.”

The tie to objectivity weighed heavily on Dixon’s decision to take a strong position in favour of legislation that would protect franchisees.

But he said he’s seen too many people lose their investments without giving the company a hard look first.

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