Nick Javor, PEI Public Hearing Testimony

At the risk of self-promotion, I wish that all franchisors, regardless of maturity and size, could embrace the same philosophy of franchising and demonstrate a “franchisee first” attitude that is clearly within the Tim Hortons chain… Marketplace success in a family of dedicated franchise owners allows us to do this and be recognized for it. We are very proud as a company for the special place we hold in the hearts of Canadians.

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Legislative Assembly of Prince Edward Island
October 25, 2001

Public Hearings on draft franchise legislation.
Charlottetown, PEI, Canada
Nick Javor, franchisor & Danny Murphy, franchisee

Standing Committee on Community Affairs & Economic Development
Session 2/61

TIM HORTONS
NICK JAVOR, DANNY MURPHY

BETH MacKENZIE (PC) CHAIR: Good afternoon and welcome. You’ve been allocated half an hour for your presentation. I just wondered when the afternoon coffee break was coming.

DANNY MURPHY: I don’t know, he must have forgot us. Anyway good afternoon folks and thank you for allowing me to speak today to the committee. My name is Danny Murphy. I’m a franchisee of three brands, Holiday Inn, Wendy’s and Tim Hortons. I’ve got 15 Tim Hortons, nine Wendy’s and one Holiday Inn and have been in the franchising business for 21 years. I employ 1,000 people here on Prince Edward Island and I have invested considerable time and money in my business and thus, am very interested in the subject that is being discussed here today. I consider myself fortunate for being in franchising. My family’s future and well being lies in the continued success of my franchise business.

I have reviewed the proposal of the Islanders for Fair Franchise Law and have a few comments to make today. My understanding of this group’s proposal is that strict regulations are required for protection of franchisees and that a franchise law may be required to protect my business and my rights as a franchisee. I quite frankly do not feel that my government needs to play a role in studying, and then creating franchise legislation.

If a government introduces legislation that will make it more difficult for my franchisors to expand in PEI, then this is not a good thing for me or for my customers. It is also not a good thing for me and my community, if my franchisors avoid investing in PEI because of red tape and bureaucracy. I sense that this would be the case if we were to have the kind of legislation proposed here today. Government’s role should be to provide help and support to businesses that want to invest in PEI, providing education and information to business people interested in franchising would be a worthwhile role for government. This is especially important for first time investors and entrepreneurs.

Also, franchisors should have the ability to protect their brand’s reputation and maintain standards. If any legislation lessens or takes away this right, then good operators will suffer and be damaged by those franchisees who do not follow standards. And who seek undeserving protection through the legislation. I believe that this proposed legislation would allow this to happen. I want my franchisor to enforce standards and I want them to protect my long-term investment. That is one of the pillars of franchising, consistency from location to location, customers come to expect the same thing at each restaurant.

This is why the franchisor must have some control in the relationship. If it cannot control the use of its brand, it may not continue to franchise or it will decide to open corporate locations instead. Again, based on what I read in the newspaper, it appears to me that some PEI franchise business owners maybe having problems with their respective franchisors. I would like to know how widespread this really is. As far as I know, franchising is working well in this province and in most provinces. I have not seen any statistics about franchise failures in PEI or apparently caused by troubled or problematic franchise systems.

I do know that Alberta and Ontario have franchise laws which give franchise investors a disclosure package before they decide to buy. This package contains considerable information that someone could review before they invest in any franchise. Disclosure to me would be a good idea.

The franchisors that I deal with clearly support me and my fellow franchisees with regular visits from their head office representatives to discuss my business. They conduct meetings at regional and national levels. They have national buying power for goods and services to save me money. They have a reward program that recognizes top performers and they have a national advisory board of franchisees that meet regularly with head office so our input is heard.

I feel sorry for franchisees who do not enjoy the same level of support that I receive. However, legislation that makes it restrictive for everyone is not the simple answer. I would hope that government is not responding to isolated cases of franchise problems, and assuming that there are problems in the entire industry ‘cause there’s not. You can’t paint everyone with the same brush. As an owner and operator of three well-known brands, I pride myself on the contributions I make to the community and to the staff that support me. The majority of the people I employ are young people who are working for their first time and who are also saving money for their education. It is important that my business continue to be successful so that I can continue to make a positive economic impact on my staff in my community.

I urge the committee to review the entire need for franchise legislation very carefully. From my perspective, PEI and its government should continue to welcome investment with open arms, and we do not need to have the reputation here as the only province in Canada that makes it difficult and costly for franchisors to come and to do business. I personally believe that the majority of franchisees here on Prince Edward Island are part of good and sound franchise systems and they operate successful businesses. Thank you.

NICK JAVOR: Good afternoon, Committee, and thank you also for having me speak on behalf of Tim Hortons. I’m Nick Javor, and I’m with the corporation as a regional vice-president in Southwestern Ontario. I have been involved in franchising since 1987. Before joining Tim Hortons, I was the president of a medium-sized franchisor for about six years. We had 90 stores at the time of which half were franchised and half were corporately run, so I’ve had experience with both types of methods of business.

I have been with Tim since ’94, and for the past two years as the regional vice president of operations that I have mentioned. My region has 415 stores, all franchised. We have 165 franchise owners that operate those stores. As a company, we have over 800 franchisees, over 2,100 locations and chain-wide sales over two billion. So we have different challenges as you can appreciate than others that you’ve heard from today.

I, too, want to point out, as others have, that I have been an active member of the Canadian Franchise Association since 1987. I served on the board for ten years and I was chairman for a term as well. I represented Canada at the first ever World Summit on Franchising in Mexico City in 1992. I was the first Canadian to receive the IFA Certification of the Certified Franchise Executive program.

I have also been committed to the process of bringing franchise legislation to Ontario, having served on the Franchise Sector Working Team as well fro six years, since its inception back in ’94. As you all know, the Franchise Act became law last summer in Ontario.

These mandatory comments, introduction, only serve one purpose everyone and that’s to indicate that I’ve been in franchising for about 15 years and I’m a very strong advocate for franchising, as a very successful business strategy. It’s an exciting industry and one I’m really happy to be involved with.

I come here today on behalf of my company, Tim Hortons, to offer our input and feedback on what’s being proposed for PEI. We corporately do not support at all, the need for franchise legislation that is the form and nature presented by the Islanders for the Franchise Law group. Tim Hortons has only ever supported disclosure type legislation. As you’ve heard many times today, Alberta and Ontario have such disclosure regulation. We quite frankly, as Tim Hortons, are concerned about the overall direction as suggested by the Islanders for Fair Franchising, because based on or knowledge, as well as through our Atlantic Council of the CFA, we don’t know why such a far reaching and potentially damaging proposal is being put forward.

Today we have heard from various speakers, and how important it is for the business community here in PEI, especially those involved in franchising, to continue to provide a positive, inviting and fertile ground for investment. It is especially important for those upstart and emerging franchise systems to have the ability to enter this market, and to do so in a way that would not unnecessarily penalize folks. At the simplest level, any government regulatory framework that even appears to be cumbersome, costly and frustrating could detract folks from setting up franchises here. This, too, may prevent local entrepreneurs from fulfilling their personal dreams of owning their own franchise business located here.

I mentioned earlier that I was involved with the Ontario consultation process. You can appreciate how many countless meetings we had and how many discussions on how best to deal with the pressing franchise issues of the day in Ontario at the time and how do we best support a very important industry; an industry that was and is still very good for Ontario and good for Canada. We studied the American history and experience. We studied other parts of the world and their jurisdictions and their experience. We had franchisee members on the team as well as government policy and legal experts. We moved forward and were united with the end result of presale disclosure legislation. For a jurisdiction in Ontario that had never had legislation and that was operating under a government’s direction of less red tape, we were able to land on a reasonable approach and I stress the word “reasonable”.

There are some areas of the Islanders For Fair Franchising proposal that I don’t think are reasonable and which may actually be difficult to implement. I also want to strongly suggest, as others have today, that this proposal not be used as the starting point for our view of franchising fro the province, as the franchisor community and other stakeholders that are involved did not participate in its creation. Let me, however, comment on a few of those areas now. Time of course doesn’t permit for a complete review of the entire package.

In Clause 4 it mentions the need for a copy of the franchise agreement and all material facts to be delivered at the first personal business meeting with the franchisor. This would mean that if someone is just kicking tires say a trade show or at a marketing open house, that a five pound box of paper would have to be given to everyone. Well, this is costly and definitely excessive.

Franchisors have developed fair and reasonable processes to screen candidates who do not qualify for financial reasons or other reasons. Once someone pre-qualifies for franchise then, in my opinion, it’s reasonable to share disclosure documents, but not before. “Material facts” has to also be clearly defined. It can be far-reaching if not defined succinctly enough. Does it refer to all information that is material at the time of the purchase decision? Or is it for any decision of the franchisee relating to the franchise?

The definition of an associate is so very broad as well. It includes any relative of the individual who has the same residence of the individual. And “Directors” is the area I’m referring to here because a spouse or child could be named in a legal action against a director of the franchisor and be held personally liable. This is quite the disincentive to have bright and talented people sit on the board of your franchise company.

In Section 5 as I read it and interpret it, under the guise of “good faith” franchisors are prohibited from holding their franchisees to above average standards. Franchisees can only be held to a commercially reasonable standard of cooperation. Is this reasonable for a franchisor to accept if they have been trying to protect the goodwill of the brand name they have been building over time?

According to Section 5(4) the protection offered under contract would be negated if it is found by the Court that the franchisor standards are commercially unreasonable. As you heard from a few people today how does one define “commercially reasonable, commercially unreasonable?” I know that some of Tim Hortons competitors have standards of operations that I would, for sure, consider to unreasonable by Tim Hortons standards.

Section 5, if I can direct you to that, also speaks about prohibiting encroachment. It is totally unreasonable in the traditional model of business format franchising for this. In a pre-sale disclosure scenario, a potential franchisee should be made aware that in the future a franchisor may open additional units in a trading area. It should also be made known if the franchisee may have the right of first refusal and whether the franchisor has a policy of encroachment. Based on all my operations experienced in franchising it’s not always in the best interest of the franchisee to take on a new location. It may be a bad business decision to expand with an existing franchisee because they may not have the financial resources to do so. They may not have a desire, an attitude to do so. They may lack management depth or a host of other reasons. And the franchise systems that I have worked in the impact of a new store, be it franchised or corporate, is always considerable.

Section 7 speaks to “payments into trust”. Up front franchise fees are often charged to cover the cost of starting up a franchise. These include costs such as the following: finding the site, design fees, training, opening crew support, etc. I know in our system that the franchisee fee does not cover the start up costs. They say that franchisors use up front fees as profit centres. This may be so but I have not seen it in my personal experience. Practically speaking, if the ability to use these funds by the franchisor is restricted then they will just have to finance the cash flow and pass the extra costs along to the franchisee.

Section 8 speaks to the non-renewal of franchise agreements. Again the model of business format franchising was never intended to allow for perpetual renewals. A franchisee has a set period of time, be it 10 years or 20 years, to maximize their earnings. At the expiration the clock is reset to zero. If a franchisor does not renew it must repurchase the franchise at fair market value or allow the franchisee to remain in the business to compete against it as per the proposal. Entitling a franchisee to use trade secrets that have been acquired over, say a 20-year relationship, indirect competition, I don’t think is a good thing. That’s why non-compete clauses are often included to prevent such a scenario. Also by sending the matter to an impartial appraiser as is suggested it could lead to re-purchase amount that is more than what the franchisee was sold for. Thus a franchisor is buying back its own goodwill. Doesn’t make sense.

Also, how does this prevent someone from overpaying for the business based on future discounted earnings streams, if that’s the methodology chosen for evaluation, and thus ultimately perhaps being saddled with an unworkable debt servicing. This could easily lead to business cash flow failures and problems. At the end of the day franchisors may resort to company operated locations if this very contentious aspect of the proposal were to remain.

Lastly, let me speak to enforcement. I was quite surprised to see the idea of having “franchise police” with search and seizure powers. Criminalizing franchise breaches is not a positive development for our industry. Civil remedies should be sufficient to manage contractual obligations. The degree of imprisonment and fines are incredibly excessive and not appropriate for the level of offences.

In preparation to come and meet with you today I spoke with a few of my industry contacts to try and ascertain who was aware of the proposed need for franchise legislation and what their position was with respect to all of it. I contacted my colleagues at McDonald’s, Wendy’s and Cara Foods, who some know are the operators of the branded concepts of Harvey’s Hamburgers, Swiss Chalet, Second Cup, Kelsey’s and Montana’s. All but one were not aware of the proposal and upon further discussion all were not in favour of departing from the experience that the industry has had in Alberta and most recently, Ontario. There is no support from this particular group of franchisors to go down the path that is being put forward potentially here. I have obtained the permission of these brands to go on record at this public hearing stating their objections.

I also canvassed support for the need to have formal industry consultation with all the parties prior to any decision by the PEI government to study the need for legislation. The group was unanimous as to the need for this to occur.

While serving on the Ontario Sector Working Team, I was part of a very positive process which involved discussions from all the special interest groups: Franchisee Coalitions; individual operators; the CFA which represents industry; the Canadian Bar Association; Canadian Federation of Independent Business; Retail Council of Canada; Canadian Bankers’ Association. A lot of stakeholders are obviously interested in the process. It was an impressive list. Everyone had a chance to give their input and submit their positions in writing. I encourage this government to ensure industry consultation occurs as well.

Another key aspect of this entire issue that also you’ve heard today is the absence of pertinent and accurate statistics. Common to all government jurisdictions that I’ve ever worked with is this lack of data. We do not know the severity of the problems in franchising in PEI and it would not be prudent to expect those who are asked to draft legislation to rely solely on anecdotal evidence. We cannot deal with marketplace perception. We must deal with marketplace reality.

I do know that we do have statistics on how important franchising is to the economics in which it participates. We heard today that franchising accounts for estimates $100 billion in sales each year and Canada leads the world in more franchise outlets per capita. A lot of people think that they’re all donut shops. They’re not all donut shops. We cannot lose sight of this incredible impact franchising and its support industries have on local economies.

A prevailing theme from the critics who say that intrusive legislation is necessary is the fact that franchise agreements are not written plain language and are often 80 pages long and four inches thick. Some have said that they have to be this long in order to capture all of the one-sided rules that franchisors must have. I agree that the language must be made simpler and more user friendly. I also agree that franchising should not be the major contributor to the retirement fund of lawyers. However, I take exception with the statement that franchise agreements are all one-sided.

Critics also comment that the level of sophistication between franchisors and franchisees is too widespread. In my opinion what is best for the less sophisticated franchisee prospects are education programs from the franchisors, the government and the trade associations like the CFA. First time franchisees need access to financial and legal advice.

My experience in the Tim Hortons system is that our franchisee candidates today are more prepared than they have ever been. They come to interviews demonstrating an incredible amount of due diligence. They ask good questions and they definitely do their homework. We actually make them work shifts behind the counter after midnight to demonstrate how unglamorous it really is. We subscribe by the approach of the “reverse sell” as a way of doing our franchise recruitment. In this day and age we do not see folks anymore dropping $10,000 on the table at a trade show to secure a franchise on the spot. Even though w3 have a successful franchise people absolutely do their homework and we’re really impressed with that and proud of that.

One of the major fundamental cornerstones of franchising is the need for system wide standards and consistent application of these standards. When franchisees join the Tim Hortons system they absolutely expect us, as their franchisor, to have a rulebook that requires standards for quality, service, cleanliness and value. When one franchisee strays out of the box, for whatever reason, and does not buy into this formula they threaten the other franchisees’ investment and erode the value of our brand. Those critics, who say that franchisors always put forward this argument to justify their heavy handedness, quite frankly in my opinion, do not understand the nuances of franchising.

Protecting the integrity of the brand is paramount in franchising. Franchisees enter into a long-term relationship with the franchisor for the purpose of accessing the brand and the ongoing support from the owners of the trademark. Part of this ongoing support is national buying power that it can provide. Bulk buying is a positive element of franchising. In Tim Hortons our franchisees clearly enjoy this benefit. A disclosure approach can obligate franchisors to state how they treat their volume discounts and what policy they have in place to handle this area. Same goes for marketing and advertising funds treatment.

Let me conclude that based on my experience in franchising the best way to set the stage for mutual success is to introduce a disclosure mechanism amongst the parties that enter into the agreement.

Over the past ten years, because of the efforts of government agencies, CFA, educational institutions, the investing public is getting better in making the right franchise decision. Numerous franchise specialists and experts can be turned to for advice. The internet is becoming an incredibly valuable tool to provide instant access to franchise company information and education.

At the risk of self-promotion, I wish that all franchisors, regardless of maturity and size, could embrace the same philosophy of franchising and demonstrate a “franchisee first” attitude that is clearly within the Tim Hortons chain. We have been in business since 1964. Our co-founder Ron Joyce, is a native of Tatamagouche, Nova Scotia. He has been awarded the Order of Canada. He was the 1999 Canadian Entrepreneur of the Year; has been inducted into the Canadian Business Hall of Fame. He’s received every possible accolade that a gentleman that’s made his contributions can get. We have five, soon to be six, Children’s Foundation Camps that send thousands of underprivileged kids to camp each year. Marketplace success in a family of dedicated franchise owners allows us to do this and be recognized for it. We are very proud as a company for the special place we hold in the hearts of Canadians.

We have also copied other successful franchisors over the years. We have marketing managers in the field as well as operations managers. We call on our franchisees; we visit with them; we help them with their businesses; we protect their investments by managing standards. Our Founder’s philosophy has always been that a franchisee’s success will result in the franchisor’s success. He would turn down a location if “it could not make the franchisee a buck”.

We are not perfect, we do have disputes from time to time and we have asked franchisees to leave our system from time to time. But we go to incredible lengths to do everything in our power to deal with these challenging operators to help them operate their businesses in a more successful way.

In summary, I strongly believe that PEI should consider the historical approaches to dealing with franchise legislation before deciding what is needed for this marketplace and for your community. Governments are given the mandate to enhance the standard of living of its citizens by creating jobs and opportunities in a positive business environment. Franchising is indeed a proven vehicle for doing this. PEI will continue to be a successful environment for franchising if the correct and fair path is chosen.

Thank you for hearing me today and I would be more than delighted to answer any questions the Committee may have.

BETH MacKENZIE (PC) CHAIR: thank you very much for your presentation. Questions from Committee members?

WILFRED ARSENAULT (PC): I have a lot of respect for the franchise that you’re associated with. As a matter of fact I wish I had 12 of them. (Laughter) You mentioned in your presentation that as far as Prince Edward Island is concerned you feel that any problems associated with franchisees, you believe, are isolated to some extent. I wonder if you could perhaps maybe speak to that as in how isolated you feel it is.

DANNY MURPHY: Problems to what franchise?

WILFRED ARSENAULT (PC): As to how many do you feel we’re talking about here?

DANNY MURPHY: Problem franchisors on the Island?

WILFRED ARSENAULT (PC): How many franchisees are having problems with their franchisors?

DANNY MURPHY: Oh, I’m sorry. Okay. I would say very, very few. I mean there are a lot of franchisees on Prince Edward Island and, you know, there are car dealers and real estate companies and fast food and hotels. It goes on and on and on. I think there’s very, very few. I mean there seems to be a problem in Souris and Debbie Tanton had a very unfortunate experience but, you know, I don’t think it’s widespread at all.

BETH MacKENZIE (PC) CHAIR: Wes?

WES MacALEER (PC): Has Tim Hortons ever used agents to sell their franchises?

NICK JAVOR: No, we do not use brokers or marketing reps. We basically have an in-house staff of a couple of folks who handle west and eastern Canada and the USA market. We’re fortunate in that a lot of folks come to us with their request for franchise kits and information. We do participate in the odd trade show. Like in the merging markets like Western Canada a couple of years ago and about a year ago in Toronto that is an active market for us. So we have chosen that we don’t have the need to do that. And quite frankly, our philosophy is the best to explain the franchise or philosophy and how we want to work with our owners than ourselves.

In our franchise recruitment process we have four different sets of interviews as a minimum and I mentioned in my remarks that we send folks on experiences where they work in the stores during the interview process and no franchise is granted until the likes of myself and my colleagues sign off and they go to speak to any franchisee they want. We allow them to go call any owner and say, look, don’t talk to us. Hear it from the folks that own the stores now. They’ll be the best judges of how the system is.

WES MacALEER (PC): In your experience as a Director of the Association, did you ever have a problem with agents selling franchises? Did you ever have to discipline anyone?

NICK JAVOR: I recall in the fast pace hectic consumption, conspicuous consumption decade of the eighties, where-in trade shows were a challenge and there were individuals there who were hocking franchises. The days of the $10,000 on the spot did exist in our industry way back when and that’s when our Association decided to take a stronger role and this was a merging one. I was heavily involved in terms of scrutinizing and deciding who gets into the trade shows, that it only be business brand format franchises. Other shows choose to platform and profile folks that, you know, are not in business brand format franchising. All we can do, to say to the public is these are the folks who you expect to be at our shows. Because we have those concerns and there were some of those issues once upon a time.

WES MacALEER (PC): In your agreements, are they signed as a head office or are they signed as in the jurisdiction in which the franchise is?

NICK JAVOR: They are in the jurisdiction where the owner lives and where the store is.

HON. MITCH MURPHY (PC): In the development of the franchise legislation in Ontario, which you were a participant, obviously at the end of the day the people who were participating in the development of that felt that the pre-contract disclosure or the pre-disclosure was the method to go. I’m just wondering, you know, one of the things that I’m wrestling with here today is that when that franchisee signs that contract with the franchisor, you know, I support the people whose comments were, look, you better go through it with a fine tooth comb. You know you should probably have your accountant, if not your lawyer, have a look at that before you sign your name on the bottom line; but the question, I guess the information I’m getting at is that why do you feel that Ontario or the people on that panel recommended to the government of Ontario to go with the pre-disclosure method vis-à-vis something that is being proposed by a group that’s before this committee today?

NICK JAVOR: A couple of areas at the time and needs of franchising at the time….was done over those, five, almost six years….were that where we had problems was people before they got into the franchise agreement or franchise relationship, perhaps were not well educated; didn’t do their diligence; were more at risk because they were going into it with not their eyes wide open, were not taking the advice of people from all the stakeholder groups saying do your diligence and before you invest, investigate. I mean we actually coined that slogan per se as a marketing message of the CFA. Then those that are best informed will make the best decision and have all your advisors involved to help you make that decision.

If you’re going from ground….like nothing going on in franchise legislation to a potential world which is way over here and think of the worst case, which we’re all sitting here saying is this really realistically implemental across a jurisdiction that’s been talking about it for thirty years off and on? Why not go and put, stack the cards for success, put it up front where you are going to benefit, we feel, most people.

Will legislation protect franchise systems right now where the franchisor doesn’t respect the franchisee and has problems with…absolutely no legislation your colleague’s can craft would help with that? If we can help educate the public through your ministries, our trade associations and good franchisors role modeling with good behaviour at trade shows, etc., we felt at the time, the stakeholders involved in Ontario, that that would be the best way to get the biggest kick at the can. Early in the process versus trying to play in a very, very difficult regulatory process. Perhaps going into a whole different way we didn’t want to go because like, where’s their best chance for success here? It’s the up front education disclosure route, giving people the right information for them to make the informed decision, kind of like what you said.

HON. MITCH MURPHY (PC): Thanks.

BETH MacKENZIE (PC) CHAIR: Thank you very much, gentlemen.

DANNY MURPHY: Thank you.

NICK JAVOR: Thank you.

This document is a spelling-corrected copy of the Verbatim Transcript of House Committee Proceedings, Province of Prince Edward Island, Canada.


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