Tony Martin asks a few questions of the Canadian Franchise Association, CFA

September 22, 2012

Mr. Richard Cunningham spoke very professionally and accurately for the franchisor- and supplier-only association.

Mr. Tony Martin, MPP was a key player in asking the right questions which helped clarify how much contempt each stakeholder had for the democratic process. There were five expert witness spots in the 4 days of travelling public hearings that resulted in the Arthur Wishart Act (Franchise Disclosure), 2000. The subcommittee gave the CFA one of those slots.  The complete record of testimony can be found on WikidFranchise.org.

Questions

[...]
Mr Martin: I’m following up on the question that Richard [Patten, MPP] asked a few minutes ago in terms of who you’ve actually kicked out of the association. I’m led to believe that, in fact, you’ve only revoked the membership of one and that was Pizza Pizza. Is that correct?

Mr Cunningham: I’m not at liberty to say, I believe. That would be privileged information of the association and I don’t think it’s appropriate to make any of that public here.

Mr Martin: You’re not going to give me any numbers even?

Mr Cunningham: No.

Mr Martin: Then just to query as to the membership in your group and who you speak for, I’m led to believe that you have 220 out of about 1,300 franchise systems in the country. Is that correct?

Mr Cunningham: I don’t what the date of that paper is, but our franchise member list is just over 300 right now because some of our member companies, like CARA, for example, would have eight brand names.

Mr Martin: And 80 of your members are lawyers, accountants or consultants?

Mr Cunningham: Correct.

Mr Martin: Also there are some big systems-and we heard from one of them today-that don’t belong to your association. Do you have any auto dealers?

Mr Cunningham: No.

Mr Martin: Do you have any food stores?

Mr Cunningham: Yes.

Mr Martin: How many?

Mr Cunningham: One chain.

Mr Martin: Petroleum stations?

Mr Cunningham: Yes, Petrocan.

Mr Martin: What about hotels and motels?

Mr Cunningham: Yes, a number of them.

Mr Martin: You made a statement earlier about the information I shared with the committee that the perception out there is that there’s lower risk by going into a franchise than the independent small business route. I have a study that suggests that’s not the case that the incidence of failure in franchising is greater than in going the independent route.

Mr Cunningham: I don’t know your study so I can’t comment on it.

Mr Martin: It’s a study called Survival Patterns among Franchisee and Nonfranchise Firms Started in 1986 and 1987. I can give you a copy of the report. It was reviewed by Ms Susan Swift from our legislative research branch, and it’s actually quite interesting. It has a number of findings that I think maybe your association might find worth looking at because it challenges very seriously the contention-and I suggest it’s something that needs to be perhaps looked into further. If we’re offering franchising in the country as a more secure way to get into business, particularly in an environment where there are a lot of people who are being restructured and walking around with severance packages looking for someplace to invest them and they are thinking that franchising is a bit more risk-free than actually setting up an independent business, then we may be sending them down a road that will result in stories such as the ones we’ve heard over the last two or three days here.

Mr Cunningham: Can I respond to that?

The Vice-Chair: Go ahead, sir. We’re just about out of time here now.

Mr Cunningham: Even if these statistics are out there, and as people are being told that franchises are more successful than non-franchises, the disclosure is going to give them the information and the ability to contact people in the system. If they call up XYZ system and talk to 10 of the franchisees and they say, “I’m not allowed to associate,” “I’m not making any money,” “I’ve been in this business five years and I’ve lost money,” or “I’m not in the system any more because I lost my life savings,” I think that in itself is going to tell those people, regardless of what any statistics are, not to buy.

Mr Martin: The problem is, though, that a lot of the people that they should actually talk to have signed confidentiality agreements and they can’t talk.

Mr Cunningham: They wouldn’t be able to do that, though, with this disclosure legislation.

The Vice-Chair: Richard, thank you so much for your time today and for the presentation you left with us.


CFA says Bank says Franchises 4 times more successful?

December 1, 2008

waynestateuusdeptcommerce1In a Blue MauMau post called Canada’s Misleading Franchise Success Rate Claims, Lionel Hutz PA quotes Ms. Lorraine McLachlan, president and CEO of the Canadian Franchise Association, as claiming:

McLachlan said that a recent study released by BMO [Bank of Montreal] indicated that nearly four times as many franchises succeed compared to independent small business.

“When you go into an established system, which is the hallmark of a franchise, the probability of success is obviously incrementally increased,” McLachlan said. “The fact that there are more than a couple of locations currently operating using that brand, using that system, suggests that it’s not a flash in the pan and that there is some history that it will succeed.”

… “in economic times such as these, the fact that you are dealing with an established system that has predictable success means that the bank in all likelihood is going to look somewhat more favourably on your application,” McLachlan said. “In many cases, the franchisor will help you work with the bank.”

The full article can be found at The Sudbury Star.

This is problematic because the franchise industry historically has been very loose with their success/failure statistics. Indeed this is what Dr. Timothy Bates of Wayne State University had to say:

Knowledgeable scholars who study franchising issues routinely express contempt for the failure rate statistics publicized by franchisors.

Francine Lafontaine, for example, states ‘one of the major selling points of franchising to franchisees over the years has been the statistics vehiculated by the trade press on the very low failure rates of franchised businesses compared to independent operations. These statistics never had real scientific basis’ (p. 14, 1994).

Such criticism does not deter the industry.
– Survival Patterns among Franchisee and Nonfranchised firms started in 1986 and 1987, U.S. Department of Commerce, p. 6.

I am unaware of any study since that time that would contradict this.

UPDATE

BMO Bank of Montreal: I had telephone conversation with Steve Iskierski, Senior Manager, National Franchising Services for BMO Bank of Montreal. Iskierski was unaware of the basis for this 4 times notion and their is certainly no study that he is aware that BMO has. He was unclear as to why Ms. McLachlan of the CFA would quote that figure and ascribed it to reporter misquotation.

Canadian Franchise Association: Emailed for copy of report. No response.

The Sudbury Star: Left a message for Janice Leuschen. No response.


Franchising is much riskier than independent business

July 24, 2008

The franchise industry is well-known for its hyperbole bordering on propaganda.

For the latest example of these half-truths and silent misrepresentations see a recent modestly named article: Franchising to the Rescue.

In my opinion, this is an unnecessarily biased and dangerous article for small business investors.

It’s assumption is that franchising is a safer investment than independent business. That claim has been exploded for at least 10 years and totally ignores the recent New Zealand experience with Blue Chip and Green Acres.

  • No mention, either, of the two Australian state franchise inquiries and the upcoming national Oz industry probe. [see an excellent Oz resource, BakersDelightLies.com]

All the credible academic research comes to the opposite conclusion: Franchising is much riskier than independent business.

Research: There is an big quality difference between true academic work [published in refereed journals, funded by public money] versus private research [biased, paid for by interest groups]. It is not enough to say that there are no reliable statistics and then go ahead and spout off unsubstantiated figures.

  • Everyone knows the public remembers the numbers while forgetting the qualifications.

Publishing these self-serving guesses [with zero opposing opinions] is bordering on reckless media behaviour. Mom-and-Pop investors are risking their life savings and homes, after all.

Timothy Bates: In 1996, this university professor published an academic study that rocked the franchise industry. Bates was contracted by the Office of Advocacy of the U.S. Small Business Adminstration to look at survival patterns of franchised and non-franchised businesses.

Survival Patterns Among Franchise and Nonfranchise Firms Started in 1986 and 1987 concluded the following [see S.B.A. Research Summary, Related Bates paper]:

  • young independent small firms had a better chance of surviving than small, non-corporate franchises,
  • while franchise firms were better capitalized than non-franchise firms, about 62 percent of the franchise firms survived, versus 68 percent of the non-franchise or independent firms,
  • average profit was much higher for the independent businesses; profits were negative, on average, for the franchise firms,
  • franchises purchased from a previous owner were riskier than franchise firms started from scratch, and
  • only 49 percent of the franchises started by women in 1987 were in existence in 1991, compared with 67 percent of the independent firms started by women.

Within the report itself, Bates said:

…the franchisee route to self-employment is associated with higher business closure rates and lower profits for the young, largely noncorporate firms, relative to independent business ownership. p. 8.

U.S. Government: On June 24, 1999 Dr. Bates appeared before the U.S. House of Representatives’s Subcommittee on Commercial and Administrative Law. The Oversight Hearings on the Franchising Relationship were called to review the state-of-the-union in American franchising. Click here for a .pdf copy of his testimony.

Bates:

Findings of my research indicate that new and small franchisees are more likely to discontinue operations than independent startups, and this holds true when firm and owner traits are controlled for statistically. One clear-cut finding was that franchisees starting by purchasing the firm from a previous owner were riskier than franchisees starting from scratch. A person entering self-employment by purchasing an ongoing franchise risks acquiring a firm that is more likely than a de novo startup to go out of business within the next few years. [my emphasis]

These Kiwi industry gentlemen know all about


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