Jim Fitzpatrick Public Hearing Testimony,

The little guy doesn't have pockets deep enough to take them on. Not only do you have a bad relationship as you go down the road, but you're going to have to take a pot of money along with you to go and do battle.

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Legislative Assembly of Ontario
March 7, 2000

Public Hearing Testimony,
Sault Ste. Marie, Ontario. Canada
Mr. Jim Fitzpatrick, franchisee, Country Style Donuts

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

JIM FITZPATRICK

The Acting Chair (Mr Ted Chudleigh): Our next witness is Country Style Donuts, Mr Jim Fitzpatrick. Mr Fitzpatrick, welcome to the committee. I was wondering if it was the Jim Fitzpatrick I used to work with, and it's not.

Mr Jim Fitzpatrick: Not the same guy. There are a few around though.

The Acting Chair: Yes, it's not an uncommon name. Please proceed.

Mr Fitzpatrick: I've been a Country Style franchisee since 1984, for the past 16 years. One of the things that I was interested in presenting is from that perspective as it applies to what I perceive to be the fairness or the unfairness of relationships within the franchise system, specifically in terms of Country Style, its limiting in terms of what you can do. The entrepreneurial component of a business is not the franchisee's responsibility but the franchisor's responsibility. So I've always been a problem to them because I'm just on the other side of the coin; I'm more of an entrepreneur than I am a franchisee per se. I operate another business completely in the manufacturing sector, so I don't have a day-to-day activity within the store component.

The limitation is that your supply side is controlled. At the outset it wasn't because they didn't have a commissary and central distribution system, but as those elements were brought into play that became a mandated requirement over and above the language within the documents of the contract. From an unfair point of view, I think the fact that they can add to the agreement as they deem appropriate, without any recourse to the franchisee—the franchisee must conform to whatever the franchisor projects as being in the interests of the global franchise and everyone involved.

There is not a poll or survey taken among the franchisees. It's something that's determined by the franchisor, and that's the long and the short of it. Those changes or requirements are not tested to identify that they are profitable or appropriate or market-driven vis-à-vis the cross section of
Ontario, where you have very different market circumstances from the north, from the metro areas, from the Ottawa area and the Thunder Bay area and so on. Those are all quite distinct markets, yet the franchisor applies his regulations on a broad-based set of rules that they develop. That to me seems to be the most onerous of responsibilities, because whether you can afford it, whether it's profitable for you or not, they just apply that.

I also think it's not reasonable that a franchisor should be able to give you a set of figures that are representative of what you can expect to do in a store without that having been proven. They can develop a set of figures that don't necessarily have to do with reality. It's their hypothetical assessment of what will happen that is the basis on which they develop the numbers. You have really no recourse after you've gotten involved in the project and find that those figures are not accurate and don't represent what your circumstances are. You're hung out to dry, because there isn't a 120-day guarantee once you find out what the problems are, and even though they are represented, you can't do anything about it. You really can't do anything about it because of the financial commitment you would have to make in order to legally try and disrupt the issue, and, if you did, the kinds of consequences you would have in the ongoing dealings with the franchisor. Once you get in, your hands are tied. You have no room to maneuvre in there whatsoever. Whatever the document says is what it's going to be.

There are the supplementary issues of the document vis-à-vis inspections or new elements that are introduced into the system that you must incorporate into your operation at your cost, and whether it's appropriate and works or not doesn't have anything to do with the reality of what you must do under the guise of it all being the same, that if someone walks into a facility in Toronto or North Bay or Sault Ste Marie or wherever, they're always going to be the same. I can appreciate and I buy into that idea as it would apply in terms of the décor and those kinds of things, but there are certainly definite issues around menu offerings and things of that sort that although you're mandated to do and you're inspected upon that—and the issue comes up where if you aren't doing what they've specified, you have 15 days to correct it or you're in violation of your franchise. So you can be on the outside looking in pretty fast if you decide it's not appropriate or you can't do it. It isn't very often that they bring the hammer down on the basis of a 15-day turnaround time, but they are certainly evaluating you on that premise.

For example, there's a system within the organization that establishes the levels of stores and the proficiencies and so forth, and if you don't conform to all of the mandated offerings, for example, you're going to be de-rated without a doubt. Again, you have the responsibility to make it up right away and correct whatever the deficiencies are.

It's certainly a "buyer beware" circumstance. I don't think government or anybody else can hold our hand unreasonably or give us the kinds of safeguards that one would like to have in a perfect world. But by the same token, I think there should be certain disclosure elements that are absolute: that you cannot represent yourself to be providing a service in terms of a franchise agreement without having case study history of your situation under these circumstances and being required to present those facts to a prospective purchaser so that they really have the correct story and not, "Well, this would be nice." You look at these numbers and say, "This would be great," and many times people are overenthusiastic about those numbers and what they can do.

As a little sidebar, in terms of a typical person wanting to get into business for themselves, you can point out a whole series of deficiencies and problems they are going to encounter, but they'll believe they can change that, that it's not going to happen to them. It happened to somebody else but it won't happen to them because they're going to do it differently. It doesn't get to be different; it gets to be the same.

But that would be my concern: that information that is presented is factual, from actual experience. That's my pitch today. Thank you.

The Acting Chair: Thank you very much. That leaves us about three minutes per caucus, and we will start with the NDP.

Questions

Mr Martin: Thanks for taking time today. I know your schedule is busy. I've tried to find you a few times. As Vic often says, it tires me out. Watching you tires me out.

Most of what I hear you speaking of today is, it seems to me, in the area of relationship. Bill 33 calls for disclosure. It doesn't require, though, what Gerry Nori suggested, some kind of a securities commission that would vet that to make sure it's true. That's not called for here. There is disclosure, and if you misrepresent yourself, you can go to court; you can be charged. The bill also has a piece in it about - and I think it's an important piece; I'm not diminishing it for a second - the right to associate. But would simple disclosure, without it being vetted, and the right to associate resolve some of the issues you've raised here today, or would we need to go further?

Mr Fitzpatrick: Very definitely, I think the franchisor would behave differently under the knowledge that the likelihood of somebody taking him to task in today's environment is much higher than it would have been 10 or 20 years ago. Therefore, if they're misrepresenting something and you find out that it's a misrepresentation after you're in - because that's when it's going to develop - if you have some recourse under the law, then you should be able to get satisfaction. The fact that you can do that, it seems to me, would inhibit an inappropriate behaviour in the first place, but with the fact that there isn't any, there's no consequence. The little guy doesn't have pockets deep enough to take them on. Not only do you have a bad relationship as you go down the road, but you're going to have to take a pot of money along with you to go and do battle. But if there is law that you can turn to in terms of, "It's wrong," and therefore you can initiate an action that is much more likely to succeed at a cost that you can deal with, that would remedy the problem.

Mr Martin: Would you support the contention of the two previous speakers that some office needs to vet the disclosure document and that there needs to be in place some kind of dispute resolution mechanism?

Mr Fitzpatrick: I'd like to see a dispute resolution mechanism, but I don't think there is any public body that could be constructed that would have the expertise and the speciality to be able to vet the cross-section of things that a franchisor might develop, or the broad cross-section of franchises. I don't think it would be reasonable to expect a board to be able to review that in any kind of a timely fashion or with the necessary expertise to really say, "No, this is wrong. " If it's there, and once the franchisee is in place, knowing that is available to him, that the representations that are being made need to be fulfilled, then if they aren't fulfilled, he in turn can go to his counsel and determine: "Do we have a case? Do we have a situation here or don't we? If we do, there's a vehicle or an avenue to do it with." But to require the franchisor to present it to an independent board, which is going to determine the reality and the truth of what they're saying, I don't think they have that kind of expertise.

Mr O'Toole: Thank you very much, Mr Fitzpatrick. I think I have a Fitzpatrick in my riding who has a doughnut franchise as well. I'll put you in touch.

Mr Fitzpatrick: I hope he's doing well also.

Mr O'Toole: It's Fitzpatrick's Donuts.

Mr Nori, a previous presenter, touched on a very important consideration, and that's the Ontario Securities Commission looking at vetting the document or the prospectus. What's your view on that? That is some kind of existing authority that would look at a disclosure document and see if it was somewhat reasonable. I'm sure would be; it would be written by a lawyer. Probably that's not true, either. It would meet the existing laws. Quite seriously, what do you think of having an independent body that looks at it like a prospectus? As you say, it is "buyer beware." There's a due diligence requirement on the part of the franchisee.

Mr Fitzpatrick: Yes.

Mr O'Toole: You can't just, like you say, hold them from cradle to grave, that kind of thing.

Mr Fitzpatrick: No.

Mr O'Toole: And charge a fee, but require that as part of it, having an independent opinion and also some accounting assessment. Like you said, they give you a prospectus saying, "This is your market, this is how many doughnuts and coffees you're going to sell," and it turns out that it's about 30% right. What do you do then?

Mr Fitzpatrick: From a prospectus point of view, it seems to me that it would be difficult. I think that if the corporation is going to sell the shares of that corporation on the public market, obviously the securities commission would have a responsibility to review and identify the appropriateness and the truthfulness and so on of that information. But when it comes down to a store situation and a site selection, there are so many variables that can come into the picture that the due diligence, I'm afraid, falls more heavily on the part of the prospective franchisee. Rather than assuming that reputation does it for you, ie, assuming that the franchisor has vetted the site, assessed it, done all the proper studies to determine that site is a good site for that product's distribution—you have to rely on them, without a question. But I don't know who could tell you that they've made the right decision or that they haven't made the right decision.

Mr O'Toole: It's difficult. I understand.

Mr Fitzpatrick: It is really difficult to be subjective to the point where you would approve or disapprove. From a corporation point of view, in terms of if they do it according to some rules divulging information that it be accurate, I think if those two issues are made mandatory before they can negotiate anything, then the person has an opportunity and is made aware, "Be careful here because there's some information that you'd better rely on yourself to determine."

Mrs Boyer: Thank you for your concerns. I gather by what you were saying that you are in favour of Bill 33 -

Mr Fitzpatrick: Yes.

Mrs Boyer: - and you are mostly interested in disclosure. You've mentioned that you would want more factual information, I guess, from the franchisor.

Mr Fitzpatrick: Yes.

Mrs Boyer: Could you elaborate on that? I know you've answered Mr O'Toole on some points, but would you -

Mr Fitzpatrick: For example, if they were required to give you a cross-section of historic data pertaining to the stores they operate - not necessarily corporate operations; that is to say, it's not the corporation running the store but it's the franchisee running the store - if they can give you a cross-section of that, they could give you the corporate store and franchisee stores so that you have some factual information to rely upon, that this has been an actual experience. It's not somebody sitting back at head office trying to put a package of information together that looks good in terms of where your costs are, the percentages and all of those kinds of things as you look down the financial statement that they present to you and you say, "This looks very good."

In my case, when I was going in and was presented with the information, I subsequently discovered that the payroll couldn't be met if I was paying the baker. You can't run a doughnut store without having a baker, but the presumption is that you're the baker. Your money doesn't come out of the payroll; your money comes out of the bottom line, really. Under that circumstance, the projection of what your costs are is not realistic, because you yourself should be paid for the work you do. You don't get $50,000 to bake doughnuts, but you certainly get $10 an hour to bake doughnuts. You know what I mean? Under those circumstances, the effort and work that you are expected to put in ought to be part of what the program demonstrates in terms of its cost factors.

Mrs Boyer: You would want to see much more easily the facts so that you could compare them before you go ahead with that type of contract.

Mr Fitzpatrick: Yes, exactly.

The Acting Chair: Thank you, Mr Fitzpatrick, for taking the time to come in and see us today. We appreciate it 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=2000-03-07&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19726#P451_164485

Copyright (c) 2000
Office of the Legislative Assembly of Ontario
Toronto, Ontario, Canada


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