Franchise Laws

Individually, the MPP's are appalled that this happens to their small business people but when we get into the Ministry of Consumer and Business Services they are not very concerned or they're not concerned with moving very quickly. These are very large organizations that are affected and there's an awful lot of money involved.

CBC Radio
January 19, 2002

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Franchise Laws
National radio broadcast transcript

Franchise Laws
CBC Radio North
Interview

MARKUS SCHWABE: About a month ago Country Style Donuts head office filed for bankruptcy protection and decided to close up some stores. Several franchise owners in Northeastern Ontario were affected, some of them opted to get rid of their flashy Country Style signs and go independent. But one storeowner in Sudbury won't have that option, head office took over Don Moore's franchise on Highway 17 in Sudbury and plans to reopen it as a corporate store in the next couple of weeks. Can they do that? Well they probably can. To find out more about the laws surrounding franchises we've reached Les Stewart he is the Head of the Canadian Alliance of Franchise Operators and he's based out of Barrie, good morning Mr.
Stewart.

LES STEWART: Good morning Markus.

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SCHWABE: So how can a company close a store because of bankruptcy and then move in and take it over again?

STEWART: It's certainly perfectly legal under the existing franchise laws in Ontario although you kind of wonder about the economics behind it.

SCHWABE: Well what about the rights of the franchise owner who's got that store in the first place?

STEWART: The rights of the franchise owner are only as much as he can afford to take the head office to court.

SCHWABE: Which is how likely?

STEWART: Very unlikely. These cases, these disputes normally drag on for three to four years and consume about a quarter of a million dollars.

SCHWABE: So they've been fought before?

STEWART: Oh yes. There's a long history of franchise lawsuits in Ontario. As a matter of fact the Ontario Government in 1998 estimated that there are 5,000 new lawsuits in franchising each year in Ontario.

SCHWABE: And are all of them along the same vein?

STEWART: They are like typically a David and Goliath situation, a very large company with deep pockets squaring off against an individual operator.

SCHWABE: And does it have to do with bankruptcies in most cases?

STEWART: Not really, not bankruptcies. But this is a strategy, a change and it just shows the unequal position of both parties.

SCHWABE: Now explain to me how it's possible that a company that is going belly-up or files for bankruptcy protection can actually take over a store that's owned by a franchise.

STEWART: They can do it simply because there is no law to prevent them from doing that and of course what happens is all of the investment of that local operator is just squandered. In many cases in Country Style that's $150,000 - 200,000 worth of owner operator capital that vanishes overnight.

SCHWABE: Do the franchisees know this when they get into the business?

STEWART: In most cases no. The franchises internationally are marketed to people that want to start a business and most of them even though they do a good job of looking into the situation they wouldn't think in their wildest dreams that this would happen to them.

SCHWABE: Do you have any other examples of things like this happening?

STEWART: Oh there certainly are. There is right now Grand and Toy across Ontario, their company simply decided in June or announced in June that well we're not going to renew your franchise contract.
So twenty-three stores at the end of 2001 were simply taken back and of course the franchisees weren't compensated at all for their investment.

SCHWABE: And what does it cost to open up one of those franchises?

STEWART: There were fairly minor initial costs but there's the cost of inventory two to three hundred thousand dollars and the staffing and all of that, the renovations that are required.

SCHWABE: And franchisors again can just do that, head office can decide we're not going to renew a contract and you lose everything?

STEWART: Exactly. Basically they can do whatever they like in Ontario and all they say to the franchisee is well “sue me”.

SCHWABE: And some do.

STEWART: Some do and are successful but the vast majority of franchisees take a look at the economics, talk to a lawyer and go away quietly in the night.

SCHWABE: Embarrassed.

STEWART: Embarrassed thinking that it's their fault, that the decision that happened somehow reflects on their hard work and their ability and in most cases it's not that situation at all.

SCHWABE: So Les what do you think should be done about this?

STEWART: Well there is an existing franchise law called the Arthur Wishart Act and it deals mostly with issues before the signing of the contract. And the government heard expert witnesses and over forty witnesses say that the real problems are after the contract is signed. So what we need is a law with teeth.

SCHWABE: And is the province interested in making changes to the system?

STEWART: We are getting mixed signals about that. Individually, the MPP's are appalled that this happens to their small business people but when we get into the Ministry of Consumer and Business Services they are not very concerned or they're not concerned with moving very quickly. These are very large organizations that are affected and there's an awful lot of money involved.

SCHWABE: From what I understand Canada's considered the wild west of franchising?

STEWART: Absolutely! There's been a 30-year call in Ontario for effective franchise regulations and in many ways countries like Chile have better laws than Ontario do.

SCHWABE: Now you're the head of the Canadian Alliance of Franchise Operators, what are you doing to combat this?

STEWART: Well we work with franchisees when they're having difficulty and also with groups of franchisees that sort of look at what happens and say “gee can we get together and try to prevent this” together with people that know what they're doing. We deal with the franchisees and we also deal on the provincial political level to encourage the government to do the right thing.

SCHWABE: Mr. Stewart thanks for joining us this morning.

STEWART: Thank you very much Markus.

SCHWABE: Bye, bye now.

STEWART: Bye, bye.

SCHWABE: That's Les Stewart he's head of the Canadian Alliance of Franchise Operators, he's based in Barrie and we'd like to hear from you. Do you have an experience as a franchise owner, maybe you used to be a franchise owner and have some thoughts to share. Call our Talkback line toll free at 1-800-461-1138 share your story, you can also send us an E-mail to ac.cbc.yrubdus|htronnrom#ac.cbc.yrubdus|htronnrom.


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