What is preventing Tim Hortons in Canada from becoming a “down-and-dirty CCAA“?

January 30, 2015

Radical re-allocations of wealth require a conducive environment.

PatrickGibbons

Patrick Gibbons: “We want to grow together. My measurement of success will be how many millionaire franchisees there are out there.”

Companies’ Creditors Arrangement Act, CCAA, Industry Canada

Case: Country Style

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Franchising creates and enforces a caste system

February 11, 2011

Franchisor opportunism can be both very rare and effective in enforcing obedience.

Obedience is enforced by controlling intra-species and inter-franchisee communication and contact.

Annual meetings, bulk emails, newsletters, site visits and faux franchisee-friendly social sites get the lesson out:

stay in your place or suffer the consequences.

The means may change but the objective stays the same.

[What was Jim Crow?, Jim Crow Museum of Racist Memorabilia]


Franchise lenders are swill

June 17, 2010

Some systems hardly have any franchisee debt.

This is particularly true of ones that converted employees to franchisees.

That changes once franchisors listen to their bankers explain how much they both can make (ie. interest kickbacks) if they leverage as many franchisees to the teats.

The primary control method of newer (maybe more formally educated?) franchisees is debt. Hundreds of thousands of supportable debt, if the franchisor who controls their gross margins, lets them service their debt.

It’s ugly:

  1. prime plus 5% (“love to give a better rate but it’s unsecured, don’t you know“),
  2. immediately callable (demand loan = short leash),
  3. plus personal guarantees up the wazzo (“just need the missus to okay the paperwork…“), but
  4. secured by NOTHING but the franchisor”s “good faith” (ok as long as the present management stays put but all deals are off if…).

If you want to unlock the chains, start asking your “preferred” lender some questions (on a public blog, btw) about their lending duty under the Bank Act.

Franchise bankers: a breed apart.

A little more sensitive than you run-of-the-mill doofus franchisor: don’t like being fingered for loan pushing, collusion or predatory franchise lending.


The Mob: A Working group of Professional Thieves

January 12, 2009

grouppeopleThieves steal to live.

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:

  1. gains are divided equally (although, different for different roles),
  2. all payouts must be paid from the net take (expenses [or nut] first deducted from gross take),
  3. all loans must be repaid from the group’s first fruits (rigidly enforced),
  4. everyone shares in the profit or loss (good or bad),
  5. the fall-dough (shared cash) is used to protect any member of the mob,
  6. each member must deal honestly with each other (burning someone is a almost unthinkable, lying is considered more serious than in straight business),
  7. if someone leaves the mob, he must ask to be taken back (type of social norm or professional consideration),
  8. a member of the mob is not responsible for things outside of his control (appreciation for the role of randomness and luck),
  9. a mob member should not cut in on another member’s area of responsibility (reflects negatively on the competence of the “helped” member), and
  10. it’s “the responsibility of every member of the mob to do everything  possible to fix a case for any member of the mob if the pinch [arrest, exposure] occurred in connection with mob activities.” p. 38

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

  • mark (potential franchisee),
  • sales agent (initial contact with mark, as the outsideman he steers marks to the mob’s preferred trademark; they are sometimes nominally independent, sometimes internal; also-known-as: consultants, franchise brokers),
  • franchisor contact (initially charming, aura of success, kept at arm’s-length until the loan proceeds are advanced and removed from mark’s current account), and
  • lender (specific bank official, specific bank branch: a high-risk, 24-hour turnaround on government guaranteed loans).

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.

  • Banks and bank officers are not being held accountable because these arrangements, although highly exploitable, provide substantial profits to the franchise bar, franchisors, etc. Canada has a well-known reputation for harbouring white-collar criminals.
  • This, however,  is very, very fertile litigation soil for outside law firms that can know what questions to ask.

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]


Franchise bankers are Always there for you (whoever you are)

December 23, 2008

friendIn 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.

  • Feel free to download a pdf copy of Franchising Opportunism right here.

With friends like these bankers, investors do not need any enemies.


Defining Unconsciounable Conduct: Is Opportunism present?

October 10, 2008

The franchisor says that his decision is allowed under the contract and is a legitimate exercise of their discretionary power.

The franchisee screaming bloody murder says that’s only an excuse and the real reason is…

  • Who do you believe: is it an excuse or a reason?  Is he a saint or a sinner?

This is a very real problem for not just judges, regulators but franchisors and franchisees. Luckily enough, a test was proposed (but not used) by a Canadian born business and law academic, Gillian K. Hadfield in 2000.

Gillian Hadfield was an expert witness at the Ontario, Canada public hearings that led up to the Arthur Wishart Act (Franchise Disclosure), 2000. Ontario Legislative Assembly Hansard, download testimony pdf

Hadifield starts off by saying that franchising has a distinct nature and a vulnerability to franchisor opportunism:

Franchising is characterized by a separation of ownership and control over the assets in the business. Franchisees own the assets; the franchisors control them…

That separation of ownership and control, however, also creates vulnerability. The fact that somebody else is controlling your assets means that you’ve got to be a little bit worried about whether they’re going to be putting them to the best use for you, or whether they’re going to be taking advantage of them.

Hadfield then explains about the sunk cost problem that franchisee’s face and provides an example of how $30,000 could be stripped away via exercising their discretionary powers opportunistically (eg. forced renovations). Free pdf

Hadfield argues that whatever you call a duty to protect against opportunism (good faith, fair dealing) what is important is what you instruct the Courts to have it mean.

One of her main recommendations is an Opportunism Test:

What’s important here is not what you call it but what you understand it to mean and what eventually courts or other enforcers understand it to mean, including what franchisors understand it to mean.

What I’m going to suggest to you is that what it needs to be understood to mean is that franchisors are explicitly obligated to exercise their discretion as if it were their own assets at risk.

Because if they’re not, that means they’re taking advantage of the fact that there is a separation of ownership and control and making a decision that, if they were the ones who had to renovate the outlet, would not be a good business decision.

Sometimes it will be, but how do you decide if it’s a good business decision or if it’s advantage-taking? You ask, “Would the franchisor have done it with their own outlet?”

Any unconscionable conduct inclusion should include Hadfield’s opportunism test:

Would the franchisor in a disagreement have acted differently IF the ownership of the assets were switched?

  • NO? Then it probably is a legitimate franchisor decision.
  • YES? Then the franchisor is probably using the frnachisee’s sunk cost investments to unfairly squeeze more cash from the franchisee.

Without direction to regulators and the Courts, unconscionable conduct will be as hollow a term to investors as good faith, fair dealings and commercial reasonableness have been in North Amercia.


Investigating the bank (1)

February 23, 2008

IndustryI started working with two clients in 2005, Alex and Andrei Oudovikine. It was suggested to me that I take a look at what the Canadian franchise bankers were up to.

Bankers love it when governments guarantee small business loans but not for the reasons most people think but that is getting ahead of the story. Anyway…

I called Industry Canada about it and they suggested I write down my concerns because the Canada Small Business Financing Act was being reviewed. I did that and Predatory Lending, IC Feb 2005.

I waited and I waited.

After one full year (365 days), I called back to see if there were any questions. Within 3 days, I was in a meeting. He suggested I write a consulting Service Proposal. I did that and here it is.

I waited and I waited.

I called Industry Canada back. They wasn’t interested but, hey, he encouraged me to check back in 2011 when the next statutory law review would take place.

So it goes in franchising.


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