The franchise industry will one day not be built on a wage subsidy from the poor.

February 19, 2015

There are consequences to driving  wages down below a certain point.

Brian Gable Globe and Mail

Brian Gable, The Globe and Mail

Because you can do something does not necessarily mean you should.

Morning Moon, The Tragically Hip


What is the Canadian Franchise Association doing to protect the 1,100 CDN franchisees and 96,000 employees at Tim Hortons?

February 1, 2015

The Canadian Franchise Association says it …advocates on behalf of franchisors and franchisees in Canada

CFA

Tim Hortons is a member of the CFA. The CFA’s Code of Ethics says that their members’ should treat each other with fairness.

Tony Martin former ON MPP and MP made certain recommendations from his experiences during the public hearings which led to Ontario’s 1st franchise law.

News Release
April 4, 2000

Investigate Franchise Association Abuses: Martin

Tony Martin, MPP

Tony Martin, MPP, Sault Ste. Marie
New Democratic Party
News Release
Legislative Assembly of Ontario, Canada

INVESTIGATE FRANCHISE ASSOCIATION ABUSES: MARTIN

TORONTO – The Consumer and Commercial Relations Ministry should investigate the Canadian Franchise Association over its failure to help Ontario franchise holders, NDP MPP Tony Martin said today.

The CFA is advising the Conservative government on proposed changes to provincial laws governing franchise agreements. But the association is under fire from hundreds of its own members for its indifference to their complaints, the NDP Critic for Consumer and Commercial Relations said in the Legislature today.

“The CFA has been of no help to many hundreds of entrepreneurs who lost their shirts in shoddy franchise deals,” Martin said. “Instead of taking the CFA’s advice this government should be sending in ministry staff to thoroughly investigate this association’s failures.”

Martin raised the case of Brenda Hope, a mother of two from Coldwater who lost $90,000 as a Chemwise Inc., franchisee. For more than a year, the CFA has refused to look into Hope’s complaints, although it endorsed Chemwise as a member.

Similarly, the CFA has refused to accept a registered letter from Bulk Barn franchisees who have a series of complaints against the franchisor. Martin was also refused when he tried to deliver the letter. The Sault Ste. Marie MPP called on Consumer and Commercial Affairs minister Bob Runciman to act now to protect small businesspeople.

“Perhaps the minister can convince the CFA to live up to its responsibilities to mediate franchise disputes. If he can’t, we need a full-scale probe of this group. It’s the least we can do for hard-working families who lose everything in dubious franchise deals,” Martin said.

The MPP has proposed his own legislation, Bill 35, that is far tougher than the government’s Bill 33. The Martin Franchise Bill would require full-disclosure of franchise contracts, a dispute resolution mechanism, the right to associate and the freedom to source products outside of the chain when not trademark related.

-30-

Also: Martin’s questions directed to the CFA during their Mar 2000 expert witness testimony.

Source

CFA National Sponsors


How can 3G Capital guarantee “no staff cuts” at the 3,600 CDN Tim Hortons franchisee-owned stores?

January 29, 2015

Industry Canada may not understand franchising: who actually employs these 96,000 Canadians.

Tim Hortons Youve been fired

Theo Moudakis / Toronto Star

But how can 3G Capital (buyers of U.S. Burger King in 2010) offer any assurances that the 1,100 or so CDN franchisees won’t be forced to lay off their staff once their gross margins and equity are “right-sized?

Is 3G Capital:

  1. incompetent,
  2. willfully misrepresenting things to Canadians and our duly elected politicians, or
  3. admitting that they are “joint employers” (with the franchisees) of those 96,000 franchisee employees?

Note recent charges against McDonald’s by the U.S. National Labor Relations Board: NLRB Charges McDonald’s as Joint Employer with Franchisees.

The National Labor Relations Board filed 13 cases against McDonald’s Corp. (NYSE:MCD) and its franchisees this month, alleging they violated the rights of employees, who worked at McDonald’s restaurants at various locations across the country.

The government agency’s complaints state that McDonald’s and its restaurant owners made statements and took actions against fast food workers for engaging in activities that aimed to improve their wages and working conditions. They accuse the parties of interfering with nationwide protests organized by unions over the past two years over their terms and conditions of employment.

Protect franchisees and they will protect their staff.

  1. Are Canadian federal officials either 1. or 2. (see above)?
  2. Is organized labour and others who wants a $15 minimum wage for the 1,140,000 franchisee-employeed staff in Canada?
  3. How about Industry Canada who risks public taxes while guaranteeing $1.4 billion of franchisee business loans (1999 to 2007).

Which is the most powerful and misunderstood provision of the most-feared franchise law in the world?

January 13, 2015

Section 4, Right to Associate, Ontario, Canada’s Arthur Wishart Act (Franchise Disclosure) 2000.

Charter of Rights

As sure as water flows downhill, this will lead to franchisee-led, not lawyer-thwarted:

  1. trademark-specific WordPress weblog (then a Wikidot.com wiki),
  2. small groups of franchisees commissioning research (sharing cost information),
  3. non-lawyer franchise expert coach consulting,
  4. an independent franchisee association (no franchise bar involvement),
  5. shared services, supply co-operative(s),
  6. non-franchise bar case preparation, and
  7. equity and gross margin protection.

The Right to Associate provision (the de facto CDN standard and what all franchisees in the world aspire to for justice) is one last conceptual obstacle preventing franchisees from taking their appropriate seat at the adult’s table.

Proof?: after 14-15 years, the CDN franchise bar has filtered each attempt to plead Right to Associate (trial and appeal), thereby, defeating the ON justices from activating its potential.

The ON Superior Court of Justice will make the link to Section 2 of the Canadian Charter of Rights and Freedoms.

ON Surperior Court of Justice

 


Welcome to the Pie Face case study in financial engineering: debt- and franchisee-destruction mode.

December 14, 2014

Modern franchising purges itself of unwanted legal obligations: debt and franchisee life savings.

Pie face welcom

It is instructive to see this ostensible “failure” in slow-motion.

Articles so far (updated on Jan 21, 2015):

Analogy: Modern franchising is the operating system software (a technology). The cute logos are simply the different software applications  that run on this extremely sophisticated operation system. There is merit in not revealing this code (eg. may hinder “cooling out the marks“)

Australia, United States, Canada, Great Britain, India, UAE…it’s all the same common law (contract law technology/architecture).

Keep an eye on WikiFranchise.org’s archive of articles on Pie Face (click here)

pieface8

Founders Wayne Homschek and Betty Fong at a Pie Face in Sydney’s Bondi Junction in the early days. Picture: Troy Bendeich Source: News Corp Australia

Intentional Insolvency: While it is revealed in the report that Mr Homschek probably has no personal assets in Australia, the Pie Face founder and his wife have now put forward a deal to seize back control of the group from voluntary administrators with the backing of TCA and a fresh capital raising on Wall Street.

That proposal will be put to creditors at a meeting slated for tomorrow in Sydney. The administrators have recommended creditors vote in favour of the proposal by Mr Homschek.


Serruya family buys Kahala, Cold Stone and others

August 23, 2013

Multi-tradename franchisors often are (how should I say this) the least sensitive to franchisees’ investment concerns,

BMM Cold stone

A very good article on Blue MauMau by Janet Sparks, Kahala Acquired in Auction by Serruya Family:

TORONTO – The Serruya family today announced that they have acquired a controlling interest in Kahala Corp., owner of Cold Stone Creamery and many other franchised brands. The transaction was completed on Monday.

The Serruya family brings substantial experience in franchising to Kahala. They are planning for growth of Kahala brands in both international and North American markets.

The new franchisors seem to have to prove something to knowledgeable franchisee advocates.

Former Cold Stone franchisee Cecil Rolle, who has been engaged in litigation with the franchisor said, “I’m hoping the acquisition of Kahala Corp by the Serruya Family is a watershed moment for Cold Stone Creamery franchisee profitability and the harmonization of the franchisor to franchisee relationship, which has been as contentious as they come. The Serruya Family will have to prove to me they are serious about the concerns of the franchisees and their families. Rolle has been an advocate for current franchisees, assisting them in profitability and other issues.

Some of the comments about the buyers from a related Globe and Mail article are speak to all the franchisees might be in for:

10. Sniktaw
Have to agree with the general thrust of the other posts here. These scumbags are right up there with Marc Tellier re ability to engineer massive shareholder value destruction whilst at the same time garnering obscene riches for themselves.
11. 911c2
i also got creamed owning their stock. Also, rode up the swisher stock that coolbrands turned into. That stock was jacked up to $10 now its at $1 again!! I will run away from anything that they are selling. No more stocks from them. won’t even try yogurtys since they r involved. Are they still doiong business deals with Jack Banqueseus aka Jack Banks who had four public shell stocks?
this post is all in my humble opinion

Franchisees have much, much less protection against opportunism than do owners of publicly traded stock.


Why is Lick’s Homeburgers & Ice Cream being killed off by its franchisor?

June 29, 2013

What franchisor sends this message to the retail market?

Licks valued customer

Is it in acting in bad faith by destroying all existing Lick’s franchisees’ equity?

  • Who would buy any of these outlets?

Licks

Media coverage:

The franchise bar, with perfect foreknowledge, will take what is left of their money in what will be (in the end) a hopelessly futile attempt at legal justice in Ontario. Talk to your premier and your small business loan provider not your a franchise lawyer.


Incentives favour franchisee attorneys defecting from their clients’ interests

October 5, 2012

The good grasp of the academic disciple of Law and Economics is necessary in understanding franchising.

Economics is (almost) all about incentives: A highly unified profession, serving a highly centralized, tightly disciplined franchisor-dominant industry  would lead the observer to predict very high levels of attorney-generated opportunism (self-interest + deceit) at the expense of their clients: individuals and groups of franchisees. The rational lawyer defects because that decision makes the best of a highly imperfect information situation.  The new franchisee bar member quickly realizes that economic survival depends on his or her obedience as a gatekeeper for the “team”, in stark contrast to a Canadian justice system that is more and more sympathetic to franchisee arguments.

Hadfield is required reading for franchisees considering contracting for such high-risk legal services (credence goods).

The Price of Law: How the Market for Lawyers Distorts the Justice System

Gillian Hadfield
USC Law School and Department of Economics
October 1999
Michigan Law Review, Vol. 98, No. 4, 2000

Abstract:
This paper begins with the question, Why do lawyers cost so much? The analysis is an investigation of the imperfections in the market for lawyers, imperfections that have been largely overlooked by focus on either the model of perfect competition or the impact of artificial barriers to entry into the provision of legal services. The paper catalogues multiple sources of imperfection: the nature of the incentives and mechanisms at work to determine the level of complexity in the system; the extent to which complexity and uncertainty make legal services into credence goods par exellence; the winner-take-all and tournament nature of the competition among lawyers; the sunk costs of lawyer-client relationships and hence the potential for opportunism and the limited potential for conventional market mechanisms to control opportunism; the incremental nature of legal fees–which structures legal expenditures as a sunk cost auction in which the cost of services can easily and rationally exceed the amount at stake; and three sources of monopoly–the familiar monopoly established by artificial barriers to entry, the “natural” monopoly arising from the limited supply of individuals in the economy with the cognitive skills necessary to engage effectively in competitive legal reasoning, and the state’s monopoly over coercive dispute resolution.

The analysis uncovers deeply disturbing implications for justice from the economics of the market for lawyers. The price dynamics of the system operate within the framework of a unified profession/unified legal system that essentially puts individual clients–with justice interests at stake–into a bidding contest with corporate clients with efficiency (more generally, market) interests at stake. Corporations by definition are aggregations of individual wealth and, as a consequence, are able to bid for the resources; they also are a richer feeding ground for the wealth extraction generated by the imperfections/monopoly aspects of the market for lawyers. This is not an ethical critique of lawyers; it is the implication of ordinary economic response to incentives structured by a non-competitive market.

The economic dynamics of the market for lawyers operate like a vacuum, drawing the resources of the system into the corporate sphere, in the service (from a public perspective) of efficiency, and away from the individual sphere, in the service of justice as in the relationships between the individual and the state, the market, the family, the community and so on. This stands on its head the lexicographic relationship between efficiency and justice: efficiency is of normative significance only to the extent it promotes individual welfare through just social relations.

The implications of the economic analysis in the paper are supported by the empirical evidence we have about the structure of the legal profession and the changes over the past several decades. The profession is roughly divided into two segments–one serving business clients and one serving individual clients. The business segment is populated by lawyers who graduated from elite institutions, who are well-connected and influential in the profession, who charge high fees and earn high incomes, and who are perceived to be in short supply. These lawyers work in large firms or high-end boutiques and are increasingly likely to be specialized. Their work is perceived to be of the highest level of prestige by all members of the profession. The personal segment is populated by lawyers who graduate from lower-tier schools, charge lower fees and often flat fees set in apparently competitive fashion providing largely routine, non-contested legal services such as house closings, uncontested divorces and wills. Their work is perceived, by them and the rest of the profession, as low prestige. Lawyers in this segment tend to work in solo practice or small general practice firms. The supply of lawyers in this segment is perceived to exceed demand, and there is evidence of un/underemployment and falling prices.

The allocation of total hours spent by lawyers on legal work is increasingly skewed towards the business segment of the profession, and thus towards the efficiency and away from the individual justice goals of the justice system. [my emphasis]

Number of Pages in PDF File: 84

Accepted Paper Series

Download from SSRN here.

 


Reebok, adidas franchisees take protests into India’s streets

September 2, 2012

It is not hard to understand what this is all about: franchisees in any language are the least likely 99% protesters in the world.

1. Franchisees protest at company’s doorstep, Business Standard, Aughust 31, 2012:

Excerpt:

The tussle between a section of Reebok franchisees and German sports-goods maker Adidas took an ugly turn today, with about 100 people protesting at the gates of the company’s headquarters in Gurgaon.

The franchisees from the National Capital Region (NCR) were protesting against the new terms proposed by the German sports goods major for operating stores in India. The company had given an ultimatum to about 70 franchisees in the NCR region to either accept the new terms, or shut shop by August 31.

Together, these franchisees operate about 125 Reebok stores in the NCR region. The franchisees, who have formed a consortium called Delhi Reebok Franchisee Association, say the new terms and conditions aren’t viable. These terms seek to do away with the minimum guarantee (MG) model the franchisees were operating on so far. Under the MG model, franchisees were assured a minimum amount from the company, irrespective of sales. It was because of this model Reebok was able to set up about 900 stores in 325 cities and towns, becoming the largest sports-wear brand in India.

2. Reebok’s Delhi franchisees cry foul over notice to close shop, SmartInvestor.In, August 26, 2012

“Now they are asking us to close the shop in just 15 days. They are saying that once the goods are transferred, it is our responsibility,” Delhi Reebok Franchisee Association spokesperson told PTI.

The franchisees claimed that they received notices from Reebok India’s parent Adidas Group on August 13 for closing down their stores by August 31 if they do not accept the new terms of the agreement.

“They are purely holding us on ransom and are not ready to settle our claims at all,” they alleged.

And…

In May this year, Reebok India had filed an FIR, alleging that its former Managing Director Subhinder Singh Prem and Chief Operating Officer Vishnu Bhagat were involved in a Rs 870-crore fraud by indulging in “criminal conspiracy” and “fraudulent” practices over a period of time.

Currently, Serious Fraud Investigation Office and the Income Tax Department are probing the alleged financial irregularities in Reebok India Company.


Opportunity Knocks and Liars’ Loans: required reading to understand modern franchising

September 1, 2012

John Lorinc wrote the book on franchising from a franchisee’s investor viewpoint.

I’m glad to see it is still available to buy online and is in many Canadian libraries.

The hidden banking side is revealed in Chapter 4, The 90% Solution: Franchise Economics, some of which I excerpted in a WikiFranchise.org post.

What did the business press have to say about Lorinc’s work?:

  1. National PostOpportunity Knocks: The Truth about Canada’s Franchise Industry, is an impressively researched look at the myriad of franchises that mushroomed across the country in the past decade. An award-winning magazine journalist, Lorinc has produced an engaging account that charts both the spectacular successes of some franchisers and the utter failure of some franchisees. How franchises seduce those with the most to lose, Jennifer Lanthier, November 2, 1997
  2. Globe and Mail: At its worst, Lorinc says, franchising is a haven for the unscrupulous who prey on the unwary – typically recent immigrants willing to labour long hours in dreary businesses, unaware that those operations have little chance of prospering – using them as pawns in a shadowy real estate game. Rather than reflecting an insatiable consumer demand, he inquires acidly, is it possible that all those new doughnut shops may reflect a quiet understanding between landlords and franchisors that the best way to fill fallow commercial property is to sell franchises to credulous investors? Franchise book of interest to anyone who pays taxes, Ann Finlayson, November 1, 1997

Finlayson strikes a cautionary note, specifically about the hinted at misuse of the Canada Small Business Financing programCSBFP:

Does all this matter to you? Yes, it does. In 1993, in the wake of vigorous complaints by small-business owners that Canadian banks were reluctant to finance them, Ottawa raised the ceiling on loans guaranteed by the Small Business Loans Administration to $250,000 and its guarantee rate from 85 per cent to 90 per cent, sparking a bank lending rush to franchisees and shifting the risk of franchise investments onto taxpayers’ (your) shoulders.

The Risk: Only a fraction of the Liars’ Loans are ever claimed by the banks, thereby grossly understating Industry Canada’s default statistics (Franchised v. Non-Franchised loan performance). The franchisee thinks he signed a government-backed loan but it never gets registered as such. As their bankruptcy, loss of life savings, marital and family breakdown escalate over the life of their 12 to 18 month franchise career, the franchisee NEVER looks to Box 9 of the CSBFP loan application form (Projected Sales ) as the source of their trouble; where the lie is put into the “Liars’ Loan”. The proceeds of these engineered-to-fail loans is split upfront by the franchise banker with the bank, banker, franchisor and sales agent. If questioned, the bank shreds the paperwork and waits for the lawsuit.

And, seriously, how many of these Immigrants as prey losers could or would ever sue a Schedule 1 chartered bank?

The Return: Smashing quarterly earnings goals, record profits, high turnover in the small business division of each of the banks, and making franchise lending the most lucrative form of commercial lending in Canada. Private gain/public loss enabled by a criminogenic environment, moral hazard, regulatory capture…

Lorinc carefully mentions the “windfall profits” in this arrangement of churning:

What’s more, some banks and franchisors have put the SBLA program [predecessor government guaranteed loan program] to questionable use during foreclosure actions against franchisees, says one former owner who has been through the process. When a bank calls a loan against a non-performing franchisee, the 90% guarantee effectively relieves the bank’s receiver from trying to get the best possible value while disposing of the owner’s assets. With most of the loan covered by the Canadian taxpayer, the assets – fixtures, kitchen equipment, inventory, etc. – can be sold quickly at a deep discount, possibly below market value. This allows the franchisor too step in and buy back the property at better-than-firesale prices, thus generating windfall profit when the store is later re-sold to another franchisee.

An important work that, depressingly, is as relevant in 2012 as it was in 1995.

______

Disclosure: My lol pecuniary interest here and here.


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