Howard Rosenberg Public Hearing Testimony

He offered me $50,000 for the equipment on a $500,000 restaurant. That's why I went to court. I couldn't sit back and—that's why I spoke up and that's why I talked to the other franchisees. I have to have a certain amount of self-respect and I have to be treated fairly, and if I'm not being treated fairly, then I'm not going to lie down and die the way the others are. Sorry I'm getting all worked up here.

LegislativeAssemblyofOntarioCostofArms.jpg

Legislative Assembly of Ontario
March 9, 2000

Public Hearing Testimony
London, Ontario, Canada
Mr. Howard Rosenberg, 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

HOWARD ROSENBERG

THE VICE-CHAIR (Mr Garfield Dunlop): Is Mr Rosenberg here?

MR HOWARD ROSENBERG: Good afternoon, ladies and gentlemen.

THE VICE-CHAIR: Before you start, Mr Rosenberg, just to the committee: Mr Martin had some previous comments about our next steps after this, so after Mr Rosenberg's presentation we'll have about 20 minutes to discuss that. Thank you very much, Mr Rosenberg.

MR ROSENBERG: I don't purport to know as much about Bill 33 as the illustrious fellow before me. However, from the summary I've seen of it, I have to wonder why it even exists. It gives franchisees the right to associate. Is this not a free country? Why do we need a bill to give franchisees the right to discuss their business and other things? I think it's superfluous and redundant. My feeling is the opposite to what the previous speaker said. We need a good, solid set of laws with respect to franchises because any franchise agreement, as the previous speaker also said, is totally one-sided.

When a franchisee enters into an agreement with a franchisor, he has no rights. I've been through it. This is why I'm saying this and it's why I'm here. My solicitor phoned me up and said, "You should come and tell your story." I'm the fellow in the story with that restaurant. I had an operations manager, a regional area manager, who had left the franchisor to come to work for me. Contrary to what you were told, I was told my store was the cleanest one in the system. So if that's the case, then don't eat at Crabby Joe's.

There was one in Welland that the franchisor closed up and reopened. There was in St Catharines that he closed up and reopened. There was one on Wellington Road in London that he closed up and reopened. Talk about fly-by-night. In that particular instance, when you have 10 stores and 40% of your stores are constantly turning over, I think we need to look at the franchisor as opposed to these franchisees.

I agree that there should be some consistency with respect to a franchise system. I've worked for a major franchisor, I've owned my own franchise and I've been a franchisee for two particular people. What I'm trying to tell you is that it's very unfair. I was closed up because the bulk of the information stated that my store was basically dirty etc. I had a health department report a month previous to that, and the London health department said everything was cool. I had been running this operation for about a year and a half. After a year and a half of running it, and the health department comes in and says everything's fine, the franchisor comes along and concocts these stories about how dirty and filthy it was and takes pictures. I have to repeat myself. The area rep, who left the franchisor and worked for me, told me that my store was the most efficient and the cleanest store of any in the chain.

This particular franchisor decided for various reasons - one of them was that I had begun to speak with another of the franchisees. I was in the south end and there was a franchisee in the east end. He came to me and a fellow from Tillsonburg also came to me and said, "There are serious problems here." I didn't start the discussions. When the franchisor got wind of this, the result of what I told you happened. I got locked up. I invested a ton of money in this restaurant. I was locked up without warning. There was no official, formal, legal warning that I was going to be locked up. One Saturday morning somebody knocked on my door and said, "Here, your restaurant is closed." Oh, well, it's only half a million dollars.

This particular franchisor - talk about fly-by-night - was involved in another chain which he converted into this chain. Again, just look at the history: All the stores closed, opened, closed, opened. In most instances he would pinpoint someone who had their life savings put into a store, and he would come along and invent some fictitious reasons for closing them up. These people had no more means to fight, so they had to curl up and die.

My lawyer said to me: "You have two choices. You can curl up and die or you can invest a little bit more money in legal fees and we have a shot at it." I had no choice. I couldn't walk away from it because I would have been totally wiped out. Fortunately, after the first day of court, when the injunction was filed, the franchisor's lawyer that afternoon contacted my lawyer wanting to settle. Believe the facts as you may, but if things were weighted so much in this fellow's favour, why would his lawyer contact my lawyer and say, "We want to settle"? The conclusions are yours.

All I'm trying to say is, as the franchisee - put yourself in a franchisee's position - you're investing all this money, whether it's McDonald's, Tim Hortons or anyone. Yes, the franchisor has a system and he's put some money into it etc, but I just don't think it's fair. Let's say you pick a really good franchise like Tim Hortons. That's almost guaranteed, but if Tim Hortons makes a mistake - for example, Tim Hortons is now in the States; I understand they're not doing as well as they are in Canada - I think that the franchisor should have some of the onus on them if a venture fails. Why is it that the franchisee puts all his faith into this franchisor and all his faith into the system, and for whatever reason, whether it's his fault or not - sometimes it's the franchisee's fault. I agree. Some franchisees do not have the experience. In my particular case, I had run a chain of 13 doughnut shops single-handedly, so I had a little bit of experience. One restaurant was not that difficult for me. But why should the franchisee lose all his money and the franchisor lose nothing?

This is what I mean by writing certain things into the legislation. I honestly believe that if it's a partnership, as some of these franchisors say, there should a partnership in the gain and in the loss. So if the franchisor makes a mistake with a location or what have you, or even in picking a franchisee - if the franchisee doesn't work out - I think the franchisor should bear some of the weight, whether it be to give the franchisee some of his money back, or be obligated to maybe purchase the equipment and pay off the bank or what have you. The problem for a franchisee is that has one shot. He has his life's savings in it, and if he loses he's finished. That's a concern for me.

The other thing is: One of the discussions I had when I originally entered discussions with the franchisor was that if I could find the identical product at a different distributor, because I had had some experience working with other distributors, would it be OK if I were to do that. Verbally he said yes, but when push came to shove he denied it. Fortunately I had a partner at the beginning, and he was a witness to our conversation and signed a document proving that I was right.

One of the reasons one buys a franchise is to achieve the volume purchasing power of the franchisor. Obviously, if somebody has 10 stores, he's going to be able to buy better than someone who has one store. In my case, I contacted a distributor and I could buy a case of ribs $5 cheaper through my distributor than I could through the franchisor's "volume purchasing." This is why I could see there was a problem. The industry standard for restaurant food costs is 32% to 33%. When I took over, mine was 40% and was in line with the rest of the franchises in that chain. So someone was making an excessive amount of money at the expense of these poor franchisees, who were investing their life's savings.

Things are fundamentally wrong. There's too much power involved with franchisors, in that they can basically invent things. Once you sign that agreement you're locked in. If you don't buy from him, bang, you're locked up. You're locked up if he doesn't like you because you are talking to other franchisees or what have you. To be honest with you, since my situation was quoted, the problem my franchisor had with me was that he was afraid I would associate with the rest of the franchises, and we were discussing starting a buying group so we could buy things cheaper.

I don't know much about the Competition Act. From what I've read about it I think it's very difficult to enforce, but there are certain clauses in it which legally prevent franchisors from getting into this "You have to buy from my distributor" type of thing. But in discussing that with my lawyer before this even happened to me, he basically said it's very hard to bring the Competition Act into the swing of things here, so just leave it.

My franchisor even set up the terms. I came in; I had credit with distributors I was dealing with. Then I had to buy from his distributor and I had to pay COD. Why? Because there's no risk to him. Secondly, I said to my distributor: "If I'm paying COD, isn't there some sort of arrangement in general business that if you pay cash you get a 2% discount?" "No, we can't give you that. This is the way the pricing structure was set up." I don't think I need to tell everyone where all the money was going: 6% of sales works out to be $6,000 if your average sales are $100,000 a month. I'm not good in math, but without spelling it out, I think you can pretty well do it.

I also find it very strange that when I was a franchisee of the second-biggest burger chain across Canada, when I had reports done by my area rep they came in at the top achievement, my stores were clean, clean health department reports in both places. On the other hand, this other franchise, had a history of life's savings, closing, life's savings, closing, new franchisee, don't buy it back, kick him out. I'm sorry: I'm not as eloquent as the previous fellow, but I'm just trying to get the message across. I didn't really want to come here and say this, but I thought that if I could come here and get this across to you people and prevent what happened to me from happening to someone else, then at least I would have accomplished something. That is really all I have to say.

THE VICE-CHAIR: We have a few minutes for questions. Mr Martin, your turn first.

MR TONY MARTIN: If you are worried about the picture that was painted about yourself by the previous presenter, not to worry. You are in an exclusive group of people that he [Peter Dillon, ed.] targeted. I happen to think that all of us are probably pretty good folk. I want to thank you for coming here today and for having the courage to share your story and to enlighten us.

It seems to me that the nub of some of your difficulty with your franchisor is this issue of tied buying or sourcing of product. You mention it as volume purchasing, and we've heard this story a few times over the last three or four days. When people who were tied into buying from the franchisor actually went out to see the market value of the product they were being forced to buy from the parent company, it was much cheaper. Had they been allowed to do that, they would have been able to make a bit more profit, support their local economy and help out in terms of generating a bit of a customer base for themselves.

Would it be fair to say that some of the issue your franchisor had with you was his inability to get you to stick to the tied buying arrangement that he would have preferred?

MR ROSENBERG: No. As I said right at the outset, I specifically said to him, face to face, "If I can buy the same product - not similar, but the exact same product - somewhere else, would I be allowed to do that?" He said, "Yes." I didn't have it in writing. That was my mistake; I should have had it from him in writing. Then when I went and did it - if I had not gotten his agreement in advance, I wouldn't have gone to buy elsewhere. I know what the franchise agreement said etc. The problem is that this fellow was making $1 million a year on royalties, rebates, liquor company kickbacks and budgets. He would get a budget of $200,000 for 10 stores and give each store $6,000.

My philosophy is, live and let live. I was in this to make a reasonable living. I see the industry standard of 32% to 33%, and I'm running a tight ship. He always tried to slough it under the rug. I had a program on my computer which gave me my theoretical food costs. He would always say, "You're not controlling things," and I would know exactly where I was out every week. If there was a steak missing or a case of chicken missing or whatever, I could go to the kitchen manager and say, "There's something wrong here." In most cases, when a businessman runs his restaurant, if he does his food costs at the end of the week and is out, he says: "It should have been 34, but it's 35. I don't know why the food costs are out." I knew exactly why. The franchisor was trying to tell me that I wasn't running a proper ship. He didn't know I had this theoretical thing.

In answering your question, my philosophy is, live and let live. This guy is making $1 million, and I'm struggling just to pay off the bank. If everything were equal, that would be fine. But when my food costs are out by 6% and they're going into his pocket, and he's just doing that so that I cannot make any money and eventually close up, that's not fair. Again, it's a matter of being treated fairly.

There has to be some regulation so there's fair treatment between the franchisor and the franchisee. If I can buy things cheaper through my franchisor, which is how it should be, then fine. That's why I'm buying a franchise: to get the volume purchasing power. I should have been able to go out and buy a case of ribs for $5 more, not $5 less. This fellow had 10 stores, and I could buy the exact same product for $5 less.

The literature he gave me originally said, "You're buying this franchise for volume purchasing power, so that you can save money." If I can save money by going out and buying it myself, then there's something fundamentally wrong. Where's the legislation that doesn't allow him to do that? There is no legislation. He can do what he wants. He can come along and say: "Hey, your store is dirty. I don't care what the health department says; I'm closing you down. You're losing all your money."

He offered me $50,000 for the equipment on a $500,000 restaurant. That's why I went to court. I couldn't sit back and—that's why I spoke up and that's why I talked to the other franchisees. I have to have a certain amount of self-respect and I have to be treated fairly, and if I'm not being treated fairly, then I'm not going to lie down and die the way the others are.

Sorry I'm getting all worked up here.

THE VICE-CHAIR: Mr O'Toole has a comment.

MR O'TOOLE: I appreciate your presentation this afternoon. It's interesting that we'd have had the attorney here at the same time; it seems a little bit unusual.

The purpose of this committee, of course, is to look at finding some suitable legislation to make sure we have fairness in competition and in the marketplace. It's not a perfect balance, but have you looked at, legislatively, the disclosure provisions within this? I know you haven't perhaps read the bill, as you said at the beginning, but disclosure, meaning making sure that those contracts are disclosing the pertinent information—I don't think too many have disagreed with the intentions there.

MR ROSENBERG: To put it bluntly, what is being disclosed does not prevent what happened to me. That's all I'm saying.

MR O'TOOLE: It would clarify, if I may - and I'm not trying to solve your problem here, by the way.

MR ROSENBERG: I don't have a problem any more.

MR O'TOOLE: But I think it would clarify these supply specifics within the contract. "You said/he said" isn't really too good for anyone, to say, "You said that I could buy it," or "They said you couldn't." Let's go to the contract and make sure that's in the disclosure document.

MR ROSENBERG: This disclosure document, are you more or less talking about a summary of the franchise agreement?

MR O'TOOLE: Yes, and I suspect it could disclose what were the provisions with respect to buying product. As you say, you are buying it for the purpose of getting volume discounts. From the perspective of the franchisor, you're really trying to get into the whole issue of product consistency and predictability; like, you're not going to buy ribs that are inferior. Do you understand? So there's some legitimacy in the franchisor specifying what products you will buy.

MR ROSENBERG: I'm not disputing that, but I'm saying that the products that I purchased were the exact - and I didn't say, "Can I buy something similar?" at the outset; I said, "If I buy the exact same product." Then I shouldn't be able to buy it; there's obviously something fundamentally wrong if I can go out and do that. Maybe there should be some legislation in there that says that if the franchisee is required to buy certain items, then it has to be at the best possible price that anyone can buy. If in fact he can buy things cheaper, then maybe the franchisor has to be penalized. The franchisee, every time he turns around, gets penalized for whatever.

MR CROZIER: If you were in this instance entering into a franchise agreement, what would prompt you to put that on the table, the question to the franchisor, "If I can buy the exact same product cheaper…?" What would prompt you to do that?

MR ROSENBERG: Only that I had my own doughnut chain of 13 stores and I had a lot of connections in the food industry with different distributors, so I thought if I could go to these distributors and save myself money, why not do that? To me, that's the way you run a business. The way I run a business is to try to minimize your labour costs, minimize your food costs to the extent that you still give good service, but if you can buy things cheaper, that's how you make the money. Your hands are tied when you're in a franchise. You can't do anything else, really. You have to do exactly what they say. So I thought if I could go out and—

MR CROZIER: See, that's what I'm trying to get straight in my own mind. What's the advantage to franchising if in fact one or the other can cherry-pick as to what they are going to abide by and what they aren't? I go back to a comment I made earlier today. There may be the instance where the only similarity between you and a franchisee in the next town is the name on the store. There has to be some standard, I guess. Obviously we've all said that it has to be fair.

MR ROSENBERG: You're missing my point, though.

MR CROZIER: You can help me.

MR ROSENBERG: I did not ask the franchisor, "If I can buy a similar type of rib, is that OK?" I asked him if I can buy the identical ribs from the same supplier, from the same manufacturer. If I were the franchisor and I had a clear conscience and I knew I was giving my franchisee the proper purchasing power, I would right off the bat say, "There's no way you will." Sure.

MR CROZIER: So then I could assume the same would apply not only to the ribs, but to the napkins, to the utensils you use, the equipment you use, the advertising you have. If you could go out and get the exact same advertising at a better price, you think you should have the flexibility to do that.

MR ROSENBERG: The exact same advertising?

MR CROZIER: Yes.

MR ROSENBERG: Well, yes. I don't think it should happen. If you've got a franchisor who has 10 franchisees - all I know is this, OK? When I had three doughnut shops and I went to a distributor and I said, "I want a price," it was very different than when I had 15 doughnut shops because of volume purchasing power.

MR CROZIER: And you were acting as franchisor in that case?

MR ROSENBERG: They were independent. They weren't franchised at all. They were just independent and I wasn't acting as franchisor.

MR CROZIER: OK, thank you.

THE VICE-CHAIR: Mr Rosenberg, thank you very much for your time today. We appreciate it very much. You brought some good points out there.

MR ROSENBERG: My pleasure.

THE VICE-CHAIR: Thank you so 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=2000-03-09&ParlCommID=1&BillID=&Business=Bill+33%2C+Franchise+Disclosure+Act%2C+1999&DocumentID=19723#P629_211033

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


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