Designing a win in franchising isn’t that hard.
You have to solve the problem (you, not them) anyways. So why not get going today? The sooner started off, the sooner out of the sewer of your undeveloped mind.
Ontario’s 35,000 lawyers should consider themselves warned.This is not just outstanding peer-to-peer legal advice (which it is: both carrot and stick) but it’s also crucial information for all current Canadian franchise investors.
The benefit of collective franchisee action has never been more justified.
David Sterns of Toronto’s Sotos LLP writes in March’s Canadian Lawyer magazine an article called: Advising the purchaser of a franchise business.
Sterns’ bottom-line advice to lawyers? (especially general attorneys):
The harsh reality is that some franchises have a failure rate as high as or even higher than non-franchised businesses. When the franchised business fails, the results are often catastrophic for the franchisee. The legal advice provided by the reviewing lawyer will come under close scrutiny, particularly if the franchisee misses the rescission window because it was unaware of its rights…
Lawyers should allocate sufficient time and charge a sufficient fee to permit a proper document review and reporting to the client. Otherwise, they should decline the retainer.
Lots of implications for the general and franchise Ontario bar.
But, hey, huge importance for the 40,000 ON investors in a current franchise relationships who are organized. Disclosure requirements are not just for the entering but whenever a material change happens to the relationship (ie. during, at renewal: any time a material or “significant” franchisor decision is made).
Did you get proper disclosure documents the last time your franchisor decided to change the rules in the middle of the game?
These are the business risks I assigned and that appear in the WikiFranchise.org entry:
This is an important article that I will visit again.
Plot Summary
Alonso Quixano, a retired country gentleman in his fifties, lives in an unnamed section of La Mancha with his niece and a housekeeper.
He has become obsessed with books of chivalry, and believes their every word to be true, despite the fact that many of the events in them are clearly impossible.
Quixano eventually appears to other people to have lost his mind from little sleep and food and because of so much reading. Wikipedia
Too much sanity may be madness. And maddest of all, to see life as it is and not as it should be!
Fortune leaves always some door open to come at a remedy.
For if he like a madman lived,
At least he like a wise one died.Quixote’s epigraph
paladin n. 1 hist. any of the twelve peers of Charlemagne’s court, of whom the Count Palatine was the chief. 2 hist. a knight errant; a champion. 3 a dedicated advocate or supporter of a cause
Thanks for the new word: Richard Solomon.
The benefits of switching to a franchised distribution model to franchisors are well-known:
But franchising your delivery system can be a double-edged sword: potentially, you lose all capacity to distribute your product in both the short- and long-term.
I’m not talking about any hostile franchisee action here.
Franchisors that too quickly dismantle their key business strategy (ie. the actual physical delivery of product to meet the end customers’ expectations) are leaving themselves extremely vulnerable.
A wise franchisor executive should treat franchisees as the true experts they are in their fields: direct customer problem-solvers.
My background, references and peer group are pretty upfront. No franchise lawyer remains as a friend to my family.
There is a time to grieve a brother‘s death as an individual, family and community.
And then a man has a duty to find out why.
The answer is often hiding in plain sight.
Professionals in thievery and business behave in a very similar manner.
Only a tiny percentage of thieves are recognized and view themselves as being professional: full time, rational and consistent planning.
The most prestigious of theft rackets is The Grift or Con games. The Grift requires cooperation among specialists.
The working group of professional thieves is known as a mob, troop, or outfit. The number of members in a mob is determined in part by the racket which is being hustled, in part by the angles which are being played, and in part by the circumstances and situations…Sometimes a large number of thieves work together in a loose organization in the more elaborate confidence games, using a common pay-off joint or big store (fake gambling club or brokerage office.) p. 27
For any group to function productively, certain rules need to be known and obeyed. This discipline is generally higher than in straight business because of the extralegal nature of some of their work.
The mob has many codes, rules, and understandings, most of which are so general that they apply to the whole profession as well as to a particular mob. p. 35
I understand (from books alone) that they are:
In addition to their specialized skills, a professional thief must have a more general capability called larceny sense.
Larceny Sense: This term is applied to the thief just as the term “business sense” is applied to the business man. It is an ability to deal with unusual situations in the best possible manner and is acquired in the course of experience. Every thief with good larceny sense will try to figure out every eventuality in taking off a touch. Some thieves are considered to have no larceny sense, while others have plenty of it.
Quotations Source: The Professional Thief, Chapter 2: The Mob, The University of Chicago, 1937 [my emphasis]
Franchise marketing, for some systems, has evolved into a specialized, highly secretive applied fraud. Each trademark system has a number of 3 or 4 professionals working to sell and resell franchises that are designed to fail for the investor.
There is no boss per se within the group. Because the work is underground, there is little documentation available.
If there is a boss in the traditional sense, it would be the banker in head office who are within the small business lending division. These Franchise Bankers (one bank per franchise system) work very closely with the franchisor for their direct lending needs as well as setting up extremely lucrative service contracts for their franchisees (current accounts, merchant accounts, etc.).
In 2000, I interviewed Dan Farmer of the Royal Bank of Canada. He stated that franchise lending was “the most lucrative form of commercial lending there is”.
Roles & Functions
In their function as lenders, bank officers owe their borrowers a legal duty to perform lender’s due diligence. They are prohibited by law from creating debt instruments that they knew or should be reasonably be expected to know would be unsustainable or result in the borrower’s financial ruin. In Canada, the relevant statutes are the Bank Act and the Canada Small Business Financing Act and Regulations.
That I am a 1/3 partner in only one active lawsuit, speaks not to the rarity of the fraud but to my restraint and patience for the cleanup to happen. In 2005, we had identified over 12 potential lawsuits involving just one franchise system, bank pairing.
Additional information on Predatory Franchise Lending and my recommendations to stop such abuse, can be found by in a paper I wrote to Industry Canada in 2005 called Franchising Opportunism: Deceit to secrsy confind. [Predatory Lending, IC Feb 2005]
In August I wrote a post called Why Australia will get a McLaw.
WA Today ran a story this week by Chalpat Sonti called Franchising inquiry slammed as golden opportunity missed.
Perth-based Narelle Walter, a former franchisee who claims that an induced breach of contract left her out of pocket by $5 million, said the committee did not go far enough:
“Franchise renewals have not been addressed properly and I am distressed that the apportion of good will has not been determined,” she said.
“Franchisors can misuse this loophole in the franchising code and the (Trade Practices Act) to steal the assets of small business investors (through a process known as “churning”, when the franchise is on-sold by the franchisor to someone else).”
Interesting that Ms. Walter draws specific reference to franchise bankers co-operating closely with franchisors:
There was still a big incentive for banks to support the franchisor in the churning process, because they would rewrite loans with an [newer] “unsuspecting” franchisee, she said.
These allegations echo others, especially MP Jo Gash in my September post called Collusion allegation: AUS bank and franchisor.
I wrote about the very cozy franchise banker :: franchisor relationship in a paper to Industry Canada in 2005 called Franchising Opportunism. It is also a good summary of how the Canadian and Australian franchise industry really works.
With friends like these bankers, investors do not need any enemies.
Congratulations.
You’re just finished your initial meeting with a franchise lawyer. You chose the baddest ass, most franchisee-friendly sob you could find. He was “kind” enough to give you 30 minutes of his time and you told him your whole story. The great man asked a few questions (actually a fair number about your net worth) but alas…unless you can rally another 9 other losers: Too bad, so sad; you’re shit out of luck.
Great bed side manner…regret to inform how weak the law is…best to put this all behind you (my most favouritest thought-terminating cliche).
You’ve just shot your mouth off to an industry insider that may very well use that information against your best interests. What?
I’ll explain with a real-life example.
1. Seven distributors walk into the most “pre-eminent” CDN franchisee lawyer’s office and tell him their story. His response: No case here go bankrupt. No if ands or buts: Do not pass Go…
2. The Group of Seven wants a second opinion. They call to me, I meet the group at their home and talk to a then-independent 2nd lawyer (just new into franchisiing but quite keen). We conclude: Excellent case. U.S. franchisor was too lazy to give disclosure documents after the Arthur Wishart Act (Franchise Disclosure) was passed in 2000. These are franchisees not distributors and therefore they can rescind their contract, dissolve their relationship and get their money back. Easy peasy.
- One set of case facts PLUS
- one Ontario law EQUALS
- 2 irreconcilably, diametrically opposed legal opinions?
How is this possible? Simple it has to do with duty and the timing of when a solicitor/client relationship is formed.
Fiduciary Duty: I am not a lawyer and the Upper Canada Law Society website wasn’t much help so here is a definition from the Canadian Encyclopedia.
The legal system recognizes a multitude of special relationships in which one party is required to look after the best interests of the other in an exemplary manner. These relationships, which include solicitor/client, physician/patient, priest/parishioner, parent/child, partner/partner, director/corporation and principle/agent, are called fiduciary relationships.
Fiduciary relationships entail trust and confidence and require that fiduciaries act honestly, in good faith, and strictly in the best interests of the beneficiaries of such relationships.
Solicitor/client Relationship: This relationship ONLY starts when you formally enter into a contract for legal services. The signs are when you cut the cheque for a retainer, sign an agreement, etc.
Anything that you say to a lawyer before you are his client (when you or the relationship is consummated) does not have this legal protection (ie. the information you provide can, and in franchising is, be used against your interests).
This is how an internationally known franchise lawyer can give you knowingly false advice at the first meeting:
There is no legal duty for him to do so because the solicitor/client relationship has NOT been created yet (before contract for legal services started).
But why turn away work? The franchisees were steered away from defending themselves because there were (and still are) literally hundreds of franchise systems in Ontario that are ignoring the Wishart Act. These are called accidental or unintentional franchises (true franchisors who don’t want to bother with some stupid provincial law) .
The first lawyer knew that by exposing the Group of Seven’s franchisor in public (ie. in Superior Court) he would be very unpopular at the next franchisor-only national trade association golf tournament. (Please don’t tell anyone but this is why this organization [ie.] has an Ombudsman program [ie.]: To have you come in and be convinced you have no case. Skim off the biggest floaters. That’s why the banks are the biggest sponsors based on the theory that they have the most damaging facts to conceal, like, Predatory franchise lending.)
When you hear these words together: You should use an expert franchise lawyer…
…you should “reach for your gun”
(Hermann Goering’s advice when you hear the word culture).
Yes you should trust your lawyer. But you should qualify him or her first. Trust but verify is a very good idea.
Since being a lawyer means having to survive in business to practice another day, you should determine where the vast bulk of his future earnings are coming from (franchisee, franchisor or non-franchised commercial law).
I always say talk to a 60-year old regional commercial lawyer with his name on the building. Anyone else is more than likely to torpedo your perfectly watertight case.