Tony Vanikiotis Public Hearing Testimony

They don't have any problem taking you to the wall and they will take you to the wall, and they will either make you walk away or they will break you financially for the rest of your life. It's that simple.

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Legislative Assembly of Ontario
March 8, 2000

Public Hearing Testimony
Ottawa, Ontario, Canada
Mr. Tony Vanikiotis, former 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

TONY VANIKIOTIS

The Vice-Chair: Our next presenter will be from Country Style Donuts, Mr Tony Vanikiotis. We have 20 minutes for your presentation, and that includes any questions. So if you wish to have any questions, and the committee does like to ask a few, we'd like to have a few minutes there at the end at least after your presentation.

Mr Tony Vanikiotis: I sat down and put basically in letter form my presentation today so that I can touch on as many things as I can in as short a period of time as possible. Hopefully, there'll be time for a few questions afterwards. I'll read my letter to the committee.

Thank you for affording me the opportunity and privilege of addressing your committee with regard to my personal experiences as a previously licensed franchisee in the province of Ontario, and more specifically in Ottawa. The franchisor in question in my case was Country Style Donuts-I'll refer to them as CSD from now on-a division of Maple Leaf Mills.

Prior to expressing an interest in acquiring this franchise, I had been a nine-year restaurateur in Ottawa, having owned and operated a l40-seat licensed LLBO establishment in downtown Ottawa. I had been looking for a new challenge after a two-year hiatus from the food service industry and was quickly sold on the idea of a CSD franchise that was available in Ottawa on Prince of Wales Drive. It was known to CSD as store number 143.

After several meetings with CSD management, I was chosen as the successful applicant. I was led to believe that my application was selected from among a number of others and that CSD felt I was the right fit for this store. I later found out that I was the only applicant and that the store had been on the market for some time since the previous franchisee had walked out.

The franchise was being marketed at $225,000 as a resale store, which meant that it was being operated by CSD head office until it could be sold. We settled on a purchase price of $140,000 with $50,000 down and the balance financed, as arranged by CSD through the Bank of Montreal on my behalf. I passed the bank's financial requirements and secured a small business loan using my home and my personal guarantee as collateral. I also had a working capital fund of $20,000, which was both a bank and a CSD requirement to complete the transaction.

Of course, there were all the fancy brochures and financial projections provided me by CSD based on sales figures that were obviously inflated and profit margins on sales that later proved to be not only unrealistic but also definitely unattainable. It was quite the sales pitch and I fell for it hook, line, and sinker.

Next came the prerequisite three-week training program at CSD commissary headquarters in Richmond Hill. There, it was drilled into us about CSD bulk buying power, and the virtues of CSD-authorized product and suppliers only in order to ensure the best possible price on the best possible product, thereby maintaining the integrity of the CSD chain and quality. I, like many others, bought into the CSD program almost like buying into a cult following. I was later to discover first-hand that the only integrity to be maintained was to be that of lining the CSD coffers at the expense of their franchisees, a practice which I am sure continues to this day.

When I got to my store and took control, profit margins were much lower than previously presented by CSD, and sales drastically lower than those shown to me for store 143. In less than three months, I had lost my $20,000 reserve and found myself scrambling to find new working capital. My father loaned me $20,000. By this time it was Christmas, which was a very slow period. By March, I knew I was in trouble again. The money my father had loaned me was now gone and I was at a loss as to what to do.

I asked CSD for assistance. Their solution: Run the store in the morning alone with one helper—my peak busy time-get rid of my weekend baker and do the bakes myself. In other words: "Instead of working 80 hours per week, work 96. In short, drop dead so we can take over the store and resell it yet again." That is when I looked to save some money by using my previous connections to local food suppliers and investigate some pricing on the same authorized product that was available locally.

These same products were available in Ottawa for between l5% and 30% less than what CSD was selling to us through their own out-of-town authorized suppliers through supposedly bulk buying power. What an eye-opener. Everything from Sunpac bottled juices to Dough Delight frozen croissants and bagels, to Chef Francisco frozen soups, to boxed Sultana raisins and walnuts. I think you get the picture.

I wrote a letter to Mr Gary MacDonald, the president of CSD, thinking he might want to know. Of course, he already did know and wanted nothing to do with my complaint. From that point on I was branded. My store was frequently visited by operations managers who sought to eliminate these items from my fridges and freezers, at one point even threatening to put product not bought from CSD into the dumpster outside. It was the same authorized product bought cheaper from local suppliers. Simply put, CSD was not milking me any more.

In my 20 months as a CSD franchisee, we switched authorized suppliers three times and authorized product too many times to remember. Obviously, CSD got better deals from new suppliers. Whatever happened to the company line during training on consistency of product and price? Eventually, CSD also boxed and labelled their own line of products, so a claim could now be made that anything non-CSD labelled was a non-authorized product. We then no longer had the ability to shop for price with local suppliers. We in fact were now boxed in as franchisees as to where we could buy legal products.

But there is more. Country Style unilaterally decided to eliminate the small size coffee cups both for take-out and drink-in. That was fine except that we would now sell the medium for small pricing, large for medium, and a new extra large for large pricing. It was an effort, they said, to compete with market forces such as Tim Hortons. Only one slight problem: Our cost had now gone up by almost 30%, but of course there was no price break afforded us by CSD head office. In effect, our one money-maker was now profit reduced by the same 30%, and we were forced to buy new ceramic mugs at over $12 each for the new in-house large. Our existing stock of both ceramic and paper cups and lids was now obsolete, and we had little or no notice other than an in-house memo delivered to us with our order from CSD warehouse.

By this time I had seen enough. A legal battle ensued, and I eventually gave over peaceful possession of store 143 back to CSD. I was tired of fighting. I was plain tired, period. I had lost my $50,000 original investment, my $20,000 working capital and my father's $20,000 loan. I almost lost my home and everything I had worked for all my life. When CSD took over the store, I owed them $70,000 in back rent, supplies, franchise fees and advertising percentages on sales. All other creditors were paid. I even arranged to pay back the Bank of Montreal over time.

In the over nine years I have been away from CSD, my store is now on its fourth owner. All previous franchisees after me have come and gone. One I know personally lost everything. In between franchisees, CSD head office runs the stores. Do they lose? Certainly not. They are not in the business to help franchisees succeed; in fact, they want them to fail. During the short period that owners like myself last, CSD makes buckets full of money from subleasing to us, while they hold the head lease with the landlord, from supplies we do buy from them and from the original cash investment given them in order to acquire the franchise. But the ultimate reward to them: They resell the franchise to some other poor, unsuspecting soul for another $140,000-plus.

They help put you in business, set you up to fail, and then, when reacquiring the franchise after you have failed, they palm it off again. This is where franchisors truly make their money: by reselling franchises that franchisees have left behind. Nice business practice, isn't it?

You are forced to buy into their CSD insurance program-for fire, theft, liability etc-that benefits no one but head office. A case in point was Mr Kuldeep Singh, the past franchisee of the Ottawa Russell Road store. His store had a fire and was gutted inside. It needed to be rebuilt. Of course CSD did the work, but installed used equipment and fixtures that had been removed from stores that were being renovated in other parts of Ontario to the newer, more modern CSD style. Shortly after Mr Singh reopened for business, he was told that he now had to renovate to the new style, of course at his own cost. I'm sure you get the idea of what I am saying. Needless to say, Mr Singh closed down for good, as did at least one other area franchisee. These stores remain closed to this day, with no visible CSD signage. There were no further franchisees to bilk.

In short, let me recap my presentation: glitzy brochures, along with unrealistic sales and profit projections on sales, in order to hook prospective franchisees; inflated pricing on authorized products supplied only by authorized suppliers or CSD themselves; reselling of franchise stores after inevitable failure of previous franchisee; insurance scams and forced renovations to comply with new CSD criteria; inflated rents on subleases as CSD holds head lease with property owners.

My story is not fiction but fact. I am to this day still paying back my debts in the form of a second mortgage on my home. I stiffed no one other than CSD, which stiffed me much worse. For this I feel no remorse. They ruined my financial health for 10 years. They did not suffer financially but in fact have made their money many times over from the same store. If you can help to stop this from happening to even one more person by way of enacting some form of legislation controlling franchisors, then my appearance before you today will have been very gratifying.

Please keep in mind that I stand to gain nothing from my appearance here today. I hope that by attending and making my views felt I can do my small part to stop franchisors like Country Style Donuts from taking advantage of people like myself for whom there is presently little or no protection.

In closing, I would like to thank Mr Ronald Dagenais, my lawyer and personal friend, and Mr Charles Gibson, who assisted me greatly as my legal counsel during my battle with CSD, and who I understand played a large role in the establishment of this committee. They are with Vincent Gour Gibson and Associates here in Ottawa. Without their tireless efforts on my behalf, at a fraction of what I should have paid in legal fees, I would have been bankrupted and CSD would have won without a battle.

You can help to make a difference, should you so choose. Thank you for listening. I just care to add that I am out of the foodservice industry, I do not have the resources to get back into the foodservice industry and I am not here as somebody who is planning to get back into the foodservice industry. I'm here to present my case, let you know how I feel, what happened to me personally, and hopefully that will have some effect on the decision you take as a committee.

The Vice-Chair: Thank you very much. We have about 10 minutes for questions on this one.

I want to make it clear that when I introduced you at the beginning I thought you were representing Country Style Donuts, and actually you're a past franchisee. I want to make sure that's clear for the record.

Tony, your turn.

Questions

Mr Martin: First of all, I want to thank you for coming and telling your story because this is exactly what this exercise is about: hearing the truth, the reality, of what's going on out there and listening to some of the people who have become victims of, I would suggest, bad systems. They're not all bad systems, there are good ones out there, but certainly your story presents a picture that is quite troubling and presents some challenges to us here.

It takes quite a bit of courage to do this. One doesn't just wake up one morning and decide to come and speak publicly, as you did. The unfortunate circumstance in many instances is that people have signed confidentiality clauses when they've gotten out of their agreements and they've moved on to other things, so they can't come and tell their stories because legally they feel they're under threat or exposed.

I have a question for you. The speaker before suggested that the problem was, if I might put it crudely, that franchisees are just too stupid and can't read or don't read the material that they're given before they get into the agreement, and if they did we wouldn't have the problems we have. What's your response to that?

Mr Vanikiotis: I certainly am not a stupid man. I ran a business for a number of years. I have a college education. I think I can read. I know I can write. I had legal advice. It's the way that the franchise opportunity is presented to the prospective franchisee, at least in my case. When you are presented sales figures that are a little over 50% of actual figures, when you move into the store and start operating it's very difficult. You assume the figures they're giving you are warranted and that the figures they're giving you are correct. You assume the profit margins are correct. You assume that pricing is correct as has been described to you. You assume you're getting what you paid for and you're going to be getting what was promised to you.

There are probably a number of franchisees out there who may not have the capability to understand the English language as well as I do or as well as many others. They are probably few and far between. I think most franchisees are very aware of what's going on around them. I just think they fall victim to circumstance, like I did. I didn't hear the previous gentleman's full speech, but I did hear that particular comment and I can't disagree more.

Mr Martin: Given your experience and the fact that you had disclosed to you probably as much material as you could get your hands on and had explained to you by your legal adviser and accountant, would a dispute resolution mechanism of some sort, a table that you could have gone to that would have had a third party, an arbitrator or a mediator, have been helpful to you in resolving some of these issues early on that so that you might have been more successful, or was the franchisor in this instance just so devious that even that would have been somehow ignored or used to their advantage?

Mr Vanikiotis: Let me explain to you that I can only speak for the Ottawa market. I'm born and raised in Ottawa. I've lived here all my life. There were four or five, maybe six Country Style Donuts stores here in Ottawa. Every single Country Style Donuts operation, every single Country Style Donuts franchisee in the city of Ottawa has gone through what I've gone through. Every single Country Style Donuts store in the city of Ottawa, in Nepean and in the region of Ottawa-Carleton has gone through the same thing. They have gone through a number of owners. They have had owners turn their stores back. They have had Country Style Donuts turn down prospective buyers in order that they themselves could take over the store and resell it. That's happened to at least two people I'm aware of.

I don't believe a dispute resolution process would serve any purpose. I believe the best thing is the fact that you people are looking at putting in some type of legislation to make it very clear up front what the conditions are and what both parties' responsibilities are.

Bottom line: If you would like to go into business, they will not change one word in that particular franchise agreement to your benefit. It's take it or leave it. If you like the business opportunity as is presented to you, you will take it. That's the trap I fell into and that's the trap that I believe many others fell into.

Mr Steve Gilchrist (Scarborough East): Thank you very much, Tony, for coming in today. It's certainly a very painful story that you've recounted to us here, and I do appreciate your taking the time and displaying the courage.

I find it more than passing strange the complete apathy of the media in dealing with not just these hearings but this issue. I guess they get their advertising dollars from Country Style Donuts so perhaps they don't see the merits in talking about the failures.

Let me explore a little further. I appreciate your last comment, and I think you were very candid with Mr Martin. If in fact at the outset you had been given, for example, a price sheet, a cost sheet of all of the supplies, something you could have gone to the Price Club, National Grocers or any of the other food wholesalers in Ottawa with and been able to compare costs, you would have discovered, presumably even before you'd signed on the dotted line, the markup that your supplier had got. If you had received quotes for the mandatory insurance costs, you'd have been able to call and get competitive quotes out there. If you'd been given a complete history of the site and of all other franchisees specifically of that site, the real history, and if the data that they had told you represented the honest sales figures were made part of the contract and therefore would be seen as misrepresentation if in fact they proved to be untrue, would that have changed your perspective before you signed on the dotted line? Would you have bought that franchise knowing those sorts of details?

Mr Vanikiotis: Knowing what I know today, based on what I've detailed in my presentation to you, no, I most certainly would not have.

Mr Gilchrist: But back then, if you'd been able to go and very quickly see that, "Wait a minute, by going through their supply, I'm going to pay 30% more," would you intuitively have thought, "This is something I should at least try and tack down during the negotiations to see if I can get it changed"?

Mr Vanikiotis: Very honestly, I wouldn't even have tried to tack it down. I would have walked away. It's that simple. As a businessman and as a person making a business decision based on an investment that I was making, I simply would have walked away.

Mr Gilchrist: So in a nutshell, if all the material details about running that business-not just the glitzy brochure-if all of the meat and potatoes had been available for you, it's your considered opinion that you would not have suffered that loss and you would not have bought that-

Mr Vanikiotis: It's not even an opinion. I would have walked away. It's that simple.

Mr Gilchrist: I absolutely am committed, and I can assure you for all three parties, that our goal in this is to build a bill that has that sort of protection in there. How anybody could disagree with disclosure-just an honest, upfront presentation of the facts-is beyond me. So I really think your time has been well spent in coming here today, and I appreciate those comments.

Mr Vanikiotis: There's one thing you have to consider in disclosure. Disclosure is all fine and dandy, and yes, it will definitely help because some people like myself will probably walk away. The problem with disclosure and with anything else is that when you as an individual need to get into a battle at some point in time with a company like Country Style Donuts or Maple Leaf Mills or whoever the franchisor may be, you will lose. You cannot afford to fight companies like that as a franchisee. They know that all of their franchisees, myself included, have limited financial capabilities. They do not have limited financial capabilities. They have lawyers on staff; they have people on call. They don't have any problem taking you to the wall and they will take you to the wall, and they will either make you walk away or they will break you financially for the rest of your life. It's that simple.

Mr Gilchrist: Scary prospect. Thank you.

The Vice-Chair: One final question. Mr Patten.

Mr Patten: Thank you very much for coming here today. It sounds to me like the legal framework provided the franchisor with the ability to make ongoing decisions that were a disadvantage to you. Did you consult with a lawyer-obviously, I guess you did, when you signed on the dotted line. But what information were you able to get about the company, the franchisor?

Mr Vanikiotis: We got their full franchise package. There were a couple of things that my lawyer cautioned against. Country Style wouldn't change a word in the franchise agreement. It was that simple. Looking at the franchise agreement and looking at the opportunity there based on the figures and things I had been made aware of-profit margins, that type of thing-with the potential that I thought was possible for that particular store, I didn't see a problem.

Mr Patten: It sounds to me like you had a case, a legal case, but you had run out of the resources in order to carry it out and go to court.

Mr Vanikiotis: There's no doubt about it. Mr Dagenais has been my personal lawyer and friend since 1980, when I got into the restaurant business. He has done many deals for me from a business standpoint. He made himself available to me at three different phone numbers, and this is a gentleman who has been in the legal profession for 30-plus years in the city of Ottawa. He made himself available to me basically 24 hours a day and put me on to Mr Gibson. Without their help, and without their help at very minimal costs, I wouldn't have been able to even walk away. I'm certain I would have lost my home and everything else; I guarantee it.

Mr Patten: My last question, just quickly. It seems to me that it might have been helpful if you had had some kind of registry that gave a profile, like you call the Better Business Bureau. People do credit checks on you. Why should that not also be available for companies in terms of their reputation or in terms of particular sites if it's not a new operation?

Mr Vanikiotis: I also think possibly a list of past franchisees for the particular area locations in this region, for example, so that if there is nothing to hide and they are marketing something that's a legitimate business that people can make a legitimate living from, then why cannot we, as prospective franchisees, contact previous franchisees to find out what happened? Did they leave? Were they forced out? Did they sell? What happened?

The Vice-Chair: Thank you so much for your time this morning, Tony. It was a pleasure to have you here.

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=2000-03-08&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19724#P155_66084

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


Risks: War of attrition, Trap for the trusting, Intimidation, Must buy only through franchisor (tied buying), Love money, Tony Martin, Franchisor takes franchisee store, resells to new dealer, False earnings claims, Government guaranteed loans, Churning (serial reselling), Lost homes, Gouging on supplies, Bankruptcy, Franchise agreements virtually non-negotiable, Can't afford to fight, Reputation registry, Canada, 20000308 Tony Vanikiotis

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