Middlemiss: Are you itching to buy a franchise?

In times like this, "franchising lends itself to con artists and flim-flammers" who will "take advantage of naive individuals."

Financial Post
June 8, 2009

Middlemiss: Are you itching to buy a franchise?
Jim Middlemiss


Franchises geared to parents who focus on spending on their children, such as Dawn Mucci's Lice Squad, are very hot right now. Peter J. Thompson/National Post

Franchises geared to parents who focus on spending on their children, such as Dawn Mucci's Lice Squad, are very hot right now. Peter J. Thompson/National Post

As layoffs and termination packages mount and companies feel the pain of the recession, more Canadians are looking for alternative employment. Some will consider buying a franchise.

People who have lost their jobs are "vulnerable," and should be careful, warns Ned Levitt, a franchise lawyer at Gowlings in Toronto. In times like this, "franchising lends itself to con artists and flim-flammers" who will "take advantage of naive individuals."

That's not to say you should avoid franchising. On the contrary, a franchise can present a good opportunity for those who want to own a business.

Mr. Levitt's firm recently surveyed 400 franchise owners, half of whom had owned their franchise for less than five years. The results were interesting. "The classic image is that they are people in their forties and fifties," he said. Yet, 52% of respondents were under 44 years old.

Most were men and 42% had worked as an employee in a different company before buying the franchise, while only 17% were self-employed and another 19% had worked for a franchise before buying their own. About 74% expect to own their franchise for a minimum of five years and 58% expect to retire when they cease to own it.

Interestingly, more than half considered opening a business before electing to go the franchise route. Among the variables that attracted them to franchising were: name recognition, training and support, a sense of lower risk and ease of buying into and running the business.

The most interesting statistics related to happiness, though, are: A startling 95% said they were either somewhat satisfied (25%) or very satisfied (70%) with their decision to purchase the franchise they own. "I was taken by the high degree of satisfaction," Mr. Levitt said.

That's not to say there aren't dissatisfied franchise owners. Canadian courts have heard a number of cases where franchisees have sued franchisors, either in class actions or individual lawsuits. Everyone from Tim Hortons to Pizza Pizza, Quiznos and Mister Transmission have been sued by unhappy owners.

Not every franchise is a success, Mr. Levitt said, pointing to car dealerships. "Is it a great time to buy a car dealership? I don't think so."

As well, he said the credit crunch means "you need to pony up more capital" to get into a franchise now. Before, you could buy one with 25% of the equity needed. Now, you need 50%, he said. "Younger [people] don't have that kind of equity."

So what's the popular franchising choice these days? "Hot food is doing really well right now. Grocery is doing well," he said. Also strong are business-to-business services, spurred by the growing trend for companies to outsource tasks, creating opportunities in everything from information technology to accounting. Children are also a big focus, as "parents are spending more on everything from educational to recreational. There's even a franchise called Lice Squad, which will dispatch someone to remove your child's head lice.

He said what's "hot right now" are franchises that have low start-up costs, which tends to favour business services over food and retail, where there are higher fixed costs.

Ben Hanuka, a franchise litigator at Davis Moldaver said potential franchisees need to protect themselves. "A franchisee should ensure he or she is well capitalized to survive the down market and choose a proven franchise with a strong track record"

Examine things such as the franchisors support network and length of time in business. Today, you need a partner who will "assist with executing strong marketing plans and running tight operations," he said.

Mr. Levitt suggests potential buyers extensively research the franchise and conduct ample due diligence.

Interestingly, his survey found those who had considered opening an independent business tended to conduct more due diligence than those whose first choice was a franchise.

The former group were more likely to speak to other franchisees, read company material, meet with company representatives, visit franchise locations, surf the company Web site, read franchising publications and examine newspaper ads.

Potential franchisees need a good accountant and good lawyer, and perhaps a real estate professional to help scout out a good location, Mr. Levitt said, adding there is higher risk going with an unproven or newer concept than sticking with an old stalwart that has been around the block a few times and gone through downturns.

As a litigator, Mr. Hanuka said, the most common problem he sees is misrepresentation, where a franchisor promises more than they can deliver, especially in terms of sales. Another issue is lack of disclosure. "It's a growing claims [area]." Nonetheless, he says now is a good time to buy a franchise. The rising vacancy rate means for retail operations "now is probably the best time in almost a decade to locate a site."

However, Mr. Levitt warns, a franchise isn't foolproof. Consumer whims and technological advances means retail and business concepts quickly fall in and out of favour. "The world is changing, he said. The trick is to try to stay ahead of the curve and find a franchise that can survive change.



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