Ed Barge Public Hearing Testimony

Should the franchisor really and truly just say, ""Sorry, chum, your enterprise is no longer viable. Goodbye""? I don't think so either. There's an element of fairness. If the franchise fee was paid and he was paying his royalties and he was doing everything by the book, why should the franchisor just abandon the franchisee? I don't think that's fair.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 6, 2000

Public Hearing Testimony
Toronto, Ontario, Canada
Mr. Ed Barge, franchisee

Standing Committee on Regulations and Private Bills
1st session, 37th Parliament

FRANCHISE DISCLOSURE ACT, 1999
Consideration of Bill 33, An Act to require fair dealing between parties to franchise agreements, to ensure that franchisees have the right to associate and to impose disclosure obligations on franchisors

ED BARGE

The Acting Chair (Mr George Smitherman): I'd like to call the next witness, Mr Ed Barge. Welcome to the committee, sir. You have 20 minutes for your presentation.

Mr Ed Barge: Good afternoon, ladies and gentlemen. Mr Les Stewart from the Canadian Alliance of Franchise Operators made contact with me some two weeks ago and asked me if I could relive my experience in the franchise world, which occurred in the year 1989-90. At the time I didn't think it was relevant, because I hoped that things had moved forward, that maybe some of the problems my particular industry had trouble with back then had been rectified and perhaps governments had had a look at things and decided that perhaps there should be changes and there should be some kind of legislation put in place. Having said all that, it seems that that hasn't happened and at least Bill 33 seems like a step in the right direction. What I'd like to do is give my background to you and take it from the point when I got out of the franchise business.

Prior to becoming a franchisee, I had spent a total of 18 years working for a large supermarket company in the United Kingdom. In this period of time, I rose from a trainee manager to the position of regional director. As a regional director, I was responsible for a total of 50 supermarkets with a total of 1,500 employees. Sales were in excess of some $250 million per annum.

I left the corporate world and decided to start my own business. During the next 15 years I opened and operated five separate and different businesses. My combined sales were in excess of $25 million. These businesses were all retail operations, ranging from a supermarket to two frozen food freezer centres, a wine and spirits operation and a health and whole food store. All were opened from scratch by myself and all had managers appointed to run them. A total of 55 staff were employed by my company.

This was also a hands-on operation, which meant that working long and hard hours was the norm, not the exception. In 1989, for personal and family reasons, I decided to return to my native Canada to investigate what opportunities there were for starting a new business. I sold my five retail outlets as going concerns and set up home here in Ontario.

The franchise route: I had always enjoyed travel and decided to examine the travel industry with the possibility of entering this profession. The main thing I liked about the travel business was that there was no physical stock to worry about, as in my previous five retail outlets. Shrinkage and stock loss was previously a big headache. As I had no experience whatsoever in the travel business, had limited computer skills and no idea of the rules and regulations as they applied to the Canadian travel industry, I decided to go the franchise route.

The thinking behind my decision was as follows:

(1) There would be training and support for my business, (2) there would be brand recognition by the public, (3) there would be corporate advertising, (4) the risk factor for failure would be substantially reduced, (5) you would not be on your own.

I applied and received a prospectus and a franchise agreement. I took the franchise agreement to my lawyer for vetting, and I checked and rechecked the prospectus projections, both the set-up costs and income forecast. I then visited a total of five existing franchisees to ascertain how well or otherwise they were doing. The information at the time seemed positive enough, but much later I found out why the true state of their franchises was not revealed.

My lawyer advised me that the agreement was totally loaded/slanted in the franchisor's favour, and that if I were to fail, there would be no comeback to the franchisor. There were no guarantees implied or given for the accuracy of the projections and no recourse if these calculations proved inaccurate.

As for my business experience, after checking the projections given by the franchisor, it was plain that if I was to make a reasonable living in this industry, I would need to own and operate more than the one travel agency. I therefore decided to open two to begin with and reserved a third site for the immediate future.

This particular franchise operated on the basis of buying out existing independent travel agency owners and then having the site refurbished and opened as a franchise store. The person who was bought out would continue to work with the new owner for an agreed period of time and would assist in the operations of the new franchised outlet.

It really did seem like an ideal set-up, but it quickly became apparent that the so-called goodwill and customer base you were buying could not be determined once the sale had been completed. The main assets, really, were the trained staff, the travel industry licences and the actual site or location of the agency. The customer base, the goodwill, the equipment, the furniture, the fixtures and fittings were all useless, and yet there was a substantial cost to the franchisee in paying for these useless features.

What you had was this: You paid for the franchise fee. You paid the owner of the travel agency you were buying, in order to have the site, the licences, the goodwill, the trained staff and the customer base, and then you had to pay for the refurbishing of the site, all the new computer equipment, the furniture, the stationery supplies and, finally, the fixtures and fittings necessary to open the new business.

When you did all this and paid for all this, you then found out that the customer base and goodwill that you had purchased did not come anywhere near what you were led to believe.

The franchise experience - my own personal experience: The cost overruns of opening my one travel agency were in excess of some $80,000; the sales forecasted by the franchisor of the two travel agencies to make a profit or return on the effort were never achieved; the costs of operating the two businesses were far higher than were projected by the franchisor.

In my own experience, you had a triple whammy to contend with: higher costs to open the franchise than you were led to believe; higher costs to run the business than you were led to believe; lower sales and revenues than you were led to believe. The break-even figure projected by the franchisor was totally inaccurate.

Please bear in mind that the average gross profit in the travel business back then was between 10% and 12% gross, so there was very little margin for error if your costs were higher than projected or if your gross profit did not manage to achieve the industry average. It did not take me long to determine that I needed $1.5 million in sales per year per agency just to break even and not the $800,000 in sales volume that was projected by the franchisor. Remember, $1.5 million in sales was to break even, not to move into profit.

Part of the franchise concept was that you were not alone. Back in 1989-90, it soon became apparent that all of the franchisees in the greater Toronto area were in the same boat, and all of our boats were sinking fast. There was a total of 15 franchisees who were slowly going under and were in danger of losing everything. There was a total of two franchisees who were actually making a go of it, but even those two were not achieving the financial success that brought them into the franchise world.

A class action lawsuit was launched on behalf of the franchisees against the franchisor, citing unrealistic/unobtainable sales and revenue projections and understated operating costs. Each franchisee eventually settled on an individual basis with the franchisor. In part, one of the main planks of the settlement was for the franchisor to find another victim to purchase the failing business in order for the franchisee to recoup some of his losses. The cycle then would continue.

All 15 of the franchisees went out of business and most, like myself, lost not only one's life's savings but one's home and ended up without an income or employment. In my case, my total financial loss exceeded $250,000, not counting the loss of my home later on in the same year. My business operated for a total of 17 months before going under and, needless to say, the third location I had planned to open never occurred.

Lessons to be learned:
(1) You can have all the business experience in the world but if the site is wrong, the structure or set-up isn't right, the sales projections are not right, the operating costs are not right, and the formulae/mix of the franchisor isn't right, you are going to fail.

(2) The 15 individuals who failed and lost everything came from a wide spectrum. Some were recent immigrants, some were business professionals, some were inexperienced, some were lazy, some worked around the clock, one was an experienced police officer, one an experienced airline pilot. The truth is all of them failed.

(3) The franchise agreement is totally loaded to the benefit of the franchisor. If the franchisee does not succeed, there are ample reasons the franchisor can give for this and this failure has nothing to do with the franchisor. The franchisee is, at the end of the day, on his own if the operation does not succeed.

(4) If the sales, operating costs and net profit projections made by the franchisor are incorrect from the beginning, the chances of overcoming the problem are slim and next to none. There is no recourse to the franchisor for his inaccurate projections outside of taking legal action.

(5) By the time the franchisee realizes he is doomed to failure, he has used up all of his financial resources to keep his business afloat and has nothing left to hire a specialist lawyer to fight the franchisor.

(6) The concept of buying out a business in order to have an immediate client base has proved to be a disaster in the travel business. The franchisee is far better off finding a good location and opening it from scratch. The franchisor uses this notion of having an immediate client base to provide assurances to the franchisee. In practice, however, this concept is wholly false.

(7) There should be some recourse available to the franchisee if he or she can prove that he or she is doing everything that is expected of him or her and yet cannot succeed in achieving the projections that he or she has been told are obtainable.

In conclusion, after my failure in the travel businessmy only business failure, I might addI have not yet been able to become financially secure. In fact, I am still paying off debt directly caused by this failure. Declaring personal or business bankruptcy should be seriously considered by those franchisees who experience failure. My own failure resulted in the loss of all of my retirement and insurance plans, my home, my car, and a strain on my marriage that is present to this day. In my case, I did not declare bankruptcy.

I am not bitter about my situation. But if an experienced, hard-working businessman can fail, what about the individuals who do not have their eyes wide open at the beginning?

Of the 15 franchisees who failed just in the greater Toronto area, I have kept in touch with two over the years and both have not recovered from their business failure either. I suspect that the vast majority of the other 12 find themselves in the same position.

I do not know the answer for regulating the franchise industry, but I do hope that this committee can find the right approach to, at the very least, give the franchisee some protection if he knows that no matter how hard he works, how many hours he puts in or how much money he uses to support his business, he isn't going to succeed.

The Acting Chair: Thank you very much. I see an interest in questions.

Questions

Mr O'Toole: Yes. Mr Gill and myself have questions. Thank you very much for bringing your story to the committee. The purpose of these hearings is to put the real face on the story of the franchise business. I commend you for sharing sincerely your experiences. It must be hard, even now, as you review and revisit. I can only assure you that I know we want to do the right thing. The lessons to be learned: You listed in number 1 the right site, the right this and the right that, that take some sense of judgment. The franchisee is at some disadvantage - we've heard that mentioned a couple of times - a fairly trusting relationship, while anticipating success. That's a difficult thing to regulate.

Mr Barge: I appreciate that.

Mr O'Toole: What can we do to strengthen the disclosure portion? I think the most central piece to this whole thing is disclosure at the time of the agreement. Are there any comments you have on that?

Mr Barge: Again, I can't speak for other industries, but the travel industry is very cyclical. So it depends entirely what time of the year you would actually get into it. If you went into it in a quiet period, for argument's sake, then the franchisor could be justified in saying, "Don't worry, the busier time is just around the corner," or "It's down the road in two months' time."

I have no idea what time frame you intend to put on having this whole discovery - but the ability to go back to the franchisor and say: "Look, you projected certain figures here. They're not achievable. I'm doing everything I can do. What are you going to do about it?"

Mr Gill: Mr Barge, thank you for sharing the information because I'm sure it's still tough, even after so many years, and many of the people would have not shared it. Many of the people who have lost and had this experience would have gone away and paid their debts. First of all, I want to thank you.

Second, I think the case in point comes to something Mr O'Toole mentioned earlier. Some of this business, and I do understand a bit of the travel business, is changing so quickly, ever since you've been in business, with the e-commerce and with the airlines cutting back and everything. I think sometimes when one is getting into it one does not realize how quickly some of these businesses are changing. I don't know if any of these laws could protect one against the changing environment of the new innovations. Any comments?

Mr Barge: You're totally right. They can't, with the marketplace changing as fast as it is, but there has to be a situation where you get into it. In other words, you're taking an established industry. However, e-commerce, if you decided to go onto the Internet now, you would be a very brave person to pay a franchise royalty and whatever, hoping that they're going to have a business that's going to sustain them five, six, 10 years.

Existing businesses that have been around for some time - there should really and truly be some measure of success or otherwise - are not changing directly overnight. The travel industry has changed, yes, and I dare say will change more as time goes by. But we were talking really in terms of buying an existing business that has not only a past but has got a relative future, no matter what that may be, two years, three years or 10 years. I still think the operations are based on. "Here, you pay your fee, you pay your royalty and you've got a good chance" - it's never guaranteed of course - "of success."

The Acting Chair: Mr Martin, four minutes.

Mr Martin: You've heard the proposal that disclosure will be the magic bullet that will solve all the problems. I don't suggest for a second that's what any of us here think. Businesses will succeed and fail no matter what we do. I think what we want to do is create at least a level playing field, a fair shot, so that if you work hard and you do the right things, you have at least a decent chance of making a living and protecting your investment.

What could we do, here, now, with the material we have in front us - you've heard some of the deputations that have gone on here - to make sure there is fairness in the system and that people have a fighting chance at making a go of it and actually being successful?

Mr Barge: Fair question. From my experience and being in business fairly recently, there has to be some kind of arbitration. There has to be an independent panel. Don't get me wrong, the franchisor in most cases is probably a decent operator and a decent company, but he has to look at the greater picture. The franchisee is looking at his own little empire and he's obviously quite concerned about that. The franchisor looks at it and says, "If I do something here, if I bail this guy out or if I agree to buy into his company or take one of his two outlets over, whatever, this leaves the door open and I'll lose my focus."

There's nowhere you could go, if both sides thought they were doing their level best, to say, "OK, who's right, who's wrong?" or maybe not even that: "OK, this is the situation that both of you people are in, the franchisor and the franchisee. What is most fair? What is an answer?" How can we put something together that both parties have something to work with, as opposed to the franchisor taking the position, "I'm strong, you're weak, and I'll survive and you won't." Nothing has changed from what I've heard here today. That's the same basis they're still using.

Mr Martin: I get the feeling from what you're saying that the focus on disclosure, as far as it goes, will not do the whole thing.

Mr Barge: It would set it up to begin with. In other words, you'll know what you're getting into to begin with, but changes will occur. Let's say, for argument's sake, there is a change in the business. Should the franchisor really and truly just say, "Sorry, chum, your enterprise is no longer viable. Goodbye"? I don't think so either. There's an element of fairness. If the franchise fee was paid and he was paying his royalties and he was doing everything by the book, why should the franchisor just abandon the franchisee? I don't think that's fair.

The Acting Chair: Thank you very much.

This document is a verbatim copy of this witness’ oral testimony. To review the original transcript: http://www.ontla.on.ca/web/committee-proceedings/committee_transcripts_details.do?locale=en&Date=2000-03-06&ParlCommID=1&BillID=740&Business=&DocumentID=19737#P747_281698

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Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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