John Lessif Public Hearing Testimony

MR TONY MARTIN: I suggest to you that the bill we have in front of us continues a regime where it's all take on the part of the franchisor and all give on the part of the franchisee. If at this point in our history we don't have the intestinal fortitude to do what is right on behalf of the many very hard-working, sincere, intelligent small business people across this province, who have been represented to some small degree over the last two or three days, telling us their stories, then this will continue. And people like you and I, who I suggest know better, will have to live with that.

LegislativeAssemblyofOntarioCostofArms.jpg

The Legislative Assembly of Ontario
March 9, 2000

Public Hearing Testimony
London, Ontario, Canada
Mr. John Lessif, McDonald’s 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

JOHN LESSIF

THE VICE-CHAIR (Mr Garfield Dunlop): Good morning. We are ready to start. We have 20-minute presentations, and that includes the question period. We like to ask at least one question from each party. I'll just notify you at the five-minute interval.

MR JOHN LESSIF: I'll do my best to allow some time.

The Vice-Chair: If you can. If we don't get time to answer questions, that's one thing, but I just wanted to let you know that that is part of the 20 minutes. You can proceed.

MR LESSIF: Mr Lessif: Good morning, everyone. My name is John Lessif, and I am the owner-operator of four McDonald's restaurants, located in the communities of Ingersoll, Tillsonburg and Woodstock. I'm also a member of the Franchise Sector Working Team, which has been involved in the development of Bill 33. I have been an active member of the FSWT since it was first established in 1995.

I am pleased to have this opportunity to offer my opinions to the committee on Bill 33. My views are based on my experience as an independent owner-operator in a franchise system and reflect my opinions as a member of the Franchise Sector Working Team.

By way of background, I have been a franchisee in the Canadian McDonald's system for 20 years, and I'm proud to say that in that time my business has evolved into a family operation involving my two children. When I chose to enter a franchise system, as opposed to starting my own business, it was because franchising offered me a readily identifiable brand, a proven operating system and the appropriate support and training.

Like me, my fellow McDonald's franchisees are independent, small business owners, and collectively we represent 70% of the system's 1,100-plus outlets across Canada. In Ontario, there are 99 franchisees who own and operate 287 McDonald's restaurants. Like any small business owner, we have invested substantial savings and have dedicated ourselves to operating viable and successful businesses.

As a McDonald's owner-operator, I pride myself on the very significant contributions my business allows me to make to my community. Not only am I highly involved in local community and charitable activities, but my business makes a considerable economic impact as well. I employ a total of 240 employees across the three communities in which I have restaurants, ranging from 60 to 100 employees per location. Perhaps most importantly, the majority of these employees are young people, high school and post-secondary students, who need that first-time employment opportunity and on-the-job training to gain a foothold in the job market. To sum up, operating a thriving business puts me in a position to make a meaningful contribution to the local economy and my community.

I'd like to talk about the issues that are in the bill. Let me begin by expressing my support for the introduction of Bill 33. I would like to take the next few minutes to comment on certain elements in the bill, as well as a number of issues that continue to be raised in the context of what is absent from the bill.

The first element is excessive regulation. At the outset, I would like to say that any legislation affecting the franchise industry must strike an appropriate balance in providing certain protections for franchisees without driving up the costs of entering the industry. There are many responsible and successful franchise systems operating in Ontario today. Legislation designed to protect the prospective or established franchisee must not be so onerous or restrictive that it penalizes responsible franchisors, either financially or administratively, resulting in excessive costs to the system.

Legislation that over-regulates the industry will only result in higher costs of doing business for both the franchisor and the franchisees like myself. On the broadest level, increasingly prohibitive costs will have a dampening effect on industry growth, to the detriment of existing systems, new franchise opportunities and associated employment growth. At a micro level, this can indirectly impact small-town owner-operators like myself, who, in the face of rising system costs, will be challenged to maintain and grow our support of the local economies, both through employment opportunities and community involvement. I believe Bill 33 balances the needs of all parties without imposing undue or costly restrictions on the franchise industry.

On disclosure: As a franchisee in a mature and successful system, I strongly believe that disclosure, one of the cornerstone principles of the draft legislation, is a critically important element in determining the viability of any business undertaking. The disclosure requirements in the bill will ensure that those interested in investing in a franchise opportunity have access to key information needed to make a fully informed decision before signing a franchise agreement.

It is also important to acknowledge that disclosure can only enable a potential franchisee to make a fact-based decision based on the actual state of a franchise system at a certain point in time. It is simply not possible through disclosure to legislate for any number of unanticipated changes that may develop over time. I believe the disclosure requirements set out in the bill are fair and reasonable and will provide the appropriate level of insight into a franchise system's financial status and operating practices.

I want to emphasize, however, that even the highest level of disclosure does not relieve the prospective investor from the obligation to undertake due diligence in evaluating the information they obtain. A prospective franchisee, like any prudent investor, must properly assess this information in conjunction with input from the appropriate advisers and independent research. In my opinion, it is incumbent on the potential franchisee to not only consult with legal and financial advisers, but to go beyond this and research local market conditions through discussions with local economic development officers and local chambers of commerce.

In summary, legislated disclosure requirements are not a guarantee for success. They are of no real value to the prospective franchisee who chooses to proceed without a proper evaluation of all the facts. Simply put, common sense cannot be legislated into the business process.

On the right to associate, there are several franchisee forums in my system that facilitate franchisee discussion on relational and business issues. For example, the McDonald's system employs franchisee strategy teams, national and regional advertising boards and a national licensee council which deals specifically with relationship issues. Further, McDonald's places no restrictions on me from associating with any organizations outside of the McDonald's system.

With regard to the right to designate suppliers, McDonald's employs a central buying system to negotiate product purchases based on its system-wide needs for both corporate and franchised restaurants. This high-volume approach results in significant economies which translate into lower costs for the Canadian system and, ultimately, our customers. As a franchisee, I also rely on the quality assurance, product specifications and product development that come with the company's involvement in procurement.

McDonald's does not use the vertical integration approach to purchasing, but rather all goods, services and products are purchased from arm's length, third-party suppliers. In addition, all corporate dealings with suppliers are transparent in that all product and distribution costs across the Canadian system are fully disclosed. Any cost savings and rebates are passed on to the whole system. Bill 33's disclosure requirements will ensure that a franchisor's policy regarding supplier rebates and discounts is known to the prospective franchisee.

While I and many of my fellow franchisees do source some products locally, I understand and accept that the strength of the centralized system and the collective benefits it provides would be undermined by any great degree of independent sourcing by those in our system.

With respect to dispute resolution, at present all disputing parties may voluntarily agree to submit to mediation. Further, it is my understanding that the recently implemented court-mandated mediation program will encompass franchisee disputes. Therefore, I question the need for a separate process to be mandated under Bill 33, particularly when no better resolution would be guaranteed. Would not a separately legislated process conflict with a court-mandated program? Again, creating a separate dispute resolution mechanism, with its associated costs, will only contribute to increased costs of doing business in the industry.

The McDonald's system supports the concept of mediation as an alternative dispute resolution mechanism and employs it on a voluntary basis. By its very nature, mediation must be voluntary to be effective.

On encroachment, I agree that, through pre-sale disclosure, a potential franchisee should be made aware that at some point in the future the franchisor may build additional outlets in a defined proximity of the subject site. It should also be clear through disclosure whether the franchisee will have the right of first refusal on any new outlets and whether the franchisor has a policy regarding encroachment. I would like to point out, however, that it may not always be in the best interests of the franchisee to assume a new site. For example, I would be making an ill-founded business decision to assume another outlet if I believe that the site is not a good one, if I do not have sufficient capital for the additional investment or if I am experiencing challenges in managing my existing business.

Encroachment is not an issue in the McDonald's system. Where a franchisee's existing business is impacted negatively by a new location, whether it be corporate or franchised, the issue is always discussed in order to reach a mutually satisfactory resolution.

On relationship standards, it is my belief that relationship standards cannot be legislated. How can trust, respect and openness be measured and interpreted in an objective way? In my view, trust, openness and respect between the franchisee and franchisor can only be established over time. The imposition of relationship standards could have a detrimental effect on the highly productive relationship that currently exists between me and my franchisor. Regulation of the franchisee-franchisor relationship would force my franchisor to work to meet an imprecisely defined standard that may be inconsistent with the culture of co-operation, consensus and collaboration that McDonald's has cultivated.

In respect to sales projections, I recognize that there have been cases where sales projections have been used loosely in the pre-sale process. I suggest that sales projections should be supplemented with two additional pieces of information: first, industry sales data that would provide the potential franchisee with a benchmark on generally how the industry is performing; and second, historic sales figures on comparable existing sites in the system. Both of these would provide the potential franchisee with more information than they might have access to otherwise.

In conclusion, from my perspective, the majority of franchisees in Ontario are involved in sound franchise systems and operate successful businesses. It's my observation that for this reason a large proportion of franchisees who fully support the bill may not take the opportunity to participate in the public hearings because they are either too busy running their businesses or simply have no issues to raise.

In closing, I support the introduction of the bill and believe that it embodies a number of key principles important to strengthening the franchise industry, to the benefit of both franchisees and franchisors. I look forward to my continued involvement in the legislative process for the bill as a member of the Franchise Sector Working Team.

I must apologize for this, because in doing a little bit of homework this morning when I got up, I realized that on Monday when I sat in at Queen's Park and listened to the presentations and in reviewing my presentation this morning, I perhaps missed communicating these points in my presentation, so I don't have anything written on this. I'm just going to give this verbally.

The Franchise Sector Working Team met a week ago and talked about five proposed amendments that the committee might consider putting into the bill. I don't have that in writing, so I'm going to give these verbally to you. After discussion at our meeting a week ago, the consensus from the team was that we should propose these to the committee today to consider in making amendments to the bill in future.

(1) To expand the right of action for misrepresentation to include agents and brokers. Currently, agents and brokers are not mentioned at all in the bill.

(2) To permit electronic disclosure. This was touched on, I know, on Monday; I don't know about in Ottawa or Sault Ste Marie. But we're recommending that you consider adding that to the regulations.

(3) To require disclosure for the sale of an additional franchise to a franchisee if a material change has occurred. That point is that when a sale is made, it currently reads that those are exempt. We don't feel that they should be exempt, so we'd like you to consider making that change.

(4) To require disclosure for renewal of pre-existing franchise agreements. Currently, pre-existing agreements do not apply in the bill, so we'd ask you to consider adding that or making the change to that.

(5) The term "payment" in the definition of the franchise; to clean up the wording on that. As it now states, there are franchisors out there which do not ask for a prepayment. These franchisors should be included. Canadian Tire, for example, when you buy that franchise you're not asked to put up a fee in advance. So, those franchisors which don't ask for prepayment should be included in the wording of the bill.

That concludes my presentation this morning. If you have any questions, I would be happy to try to answer them.

THE VICE-CHAIR: We've got about six minutes. First, the PC caucus, have you got any comments?

MR JOHN O'TOOLE (Durham): Yes. Thank you, Mr Lessif, I appreciate that, and I'd like to thank you for your work on the franchise working group. I think they've worked very hard to come up with some sort of balance, and I appreciate that. Just to reinforce a couple of points, I appreciate the amendments as well. This is an ongoing thing. There's always a state of reviewing excellence, and that's what it's about. It's in a continual state of review. In a regulatory sense, probably the easiest way to legislate this is to provide a legislative framework with regulations that can be ongoing and updated.

There are just a couple of points I'd like to re-emphasize. You mentioned, after your 20 years of experience in a successful operation, the due diligence that's incumbent on the franchisee. Would you like to see incorporated some strengthening of those duties so that they're actually signing off? We've had this mentioned on two or three occasions, having independent legal advice rather than just rushing in and opening that store and getting going. A lot of the enthusiasm for new business operations is such that they want to get going; they may not take the due diligence. So how about the independent legal advice and the independent financial advice? You have mentioned that, but perhaps you'd like to address it.

MR LESSIF: If I understand your question, you're suggesting that it be put in a regulation for the franchisee to sign off on?

MR O'TOOLE: Yes.

MR LESSIF: I think that's an excellent suggestion, by all means, because what happens when you start a new business is that the adrenalin gets flowing and sometimes your heart rather than your head makes some of your decisions for you. That's an excellent suggestion.

MR BRUCE CROZIER (Essex): We don't have much time and I thank you for your presentation. In your conclusion you said from your perspective the majority of franchisees in Ontario are involved in sound franchise systems. What is your perspective, to back up that statement?

MR LESSIF: My perspective is just my knowledge of the franchise industry for me as an independent person involved in our chambers of commerce in three communities in southwestern Ontario, that experience that I have.

MR CROZIER: Do you have some knowledge across Ontario, to make that statement?

MR LESSIF: Only in respect to the fact that I'm involved in many of the organizations that McDonald's has from a franchisee standpoint, so I get exposed to a lot of Ontario, other communities.

MR CROZIER: OK. Thank you.

MR TONY MARTIN (Sault Ste Marie): We've heard some pretty sad stories over the last two or three days in front of this committee, both in camera and in public, of particularly franchisees who find themselves caught up in bad systems that act unilaterally, have agreements that are stacked in their favour and they have no compunction about using that.

You present your case as a man with a family who's been in this business for 20 years, and I suspect that you hope to be there for a good long time to come -

MR LESSIF: God willing.

MR TONY MARTIN: - and perhaps even pass some of these entities on to your children to run.

We had a number of people before us yesterday in particular who were hoping to do the same thing. I wouldn't characterize them as young, woolly-eyed, heart-pounding, excited entrepreneurs. Some of them have been in the business for a long time. Some of them learned the business from their fathers and their mothers. At this point in their history they're under threat of losing that business and don't see for them a bill that focuses almost solely on disclosure of information on the sale or buying of a franchise as in any way going the distance to protect their interests or to give them a fair shake at protecting their interests.

What do you have to say to them this morning that might give them some comfort re this legislation that we're considering?

MR LESSIF: I'd like to respond to that wearing two hats, one as an independent owner-operator and the other as a member of the Franchise Sector Working Team.

Over the last five years the team put our best thinking together, which you people have in front of you there, for the wording of the meat of the bill, and there was give and take in that. It's not a perfect scenario. There was give from franchisors and there was give from the franchisee's point of view.

What this bill does, I think, is present a fair and equitable situation to look after all franchise scenarios. I can't speak to an individual who has had a franchise for a number of years and for whatever reasons is faltering. You are asking me to answer a somewhat speculative question, and I don't think I can answer that.

MR TONY MARTIN: I suggest to you that the bill we have in front of us continues a regime where it's all take on the part of the franchisor and all give on the part of the franchisee. If at this point in our history we don't have the intestinal fortitude to do what is right on behalf of the many very hard-working, sincere, intelligent small business people across this province, who have been represented to some small degree over the last two or three days, telling us their stories, then this will continue. And people like you and I, who I suggest know better, will have to live with that.

THE VICE-CHAIR: You have about a minute left to respond.

MR LESSIF: I guess my comment on that is that the Franchise Sector Working Team put this bill together to submit to this committee to amend or add to. In our best judgement, this is a fair bill that answers to the points you made. That would be my response to that and my comment on that.

THE VICE-CHAIR: Thank you, Mr Lessif. I appreciate that very much, and thank you for bringing those proposed amendments for us today too.

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#P22_2418

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


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